Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, October 12, 2010

Innovation by Entrants and Incumbents

Posted by D. Daniel Sokol

Daron Acemoglu, Massachusetts Institute of Technology (MIT) - Department of Economics and Dan Vu Cao, Georgetown University - Department of Economics discuss Innovation by Entrants and Incumbents.

ABSTRACT: We extend the basic Schumpeterian endogenous growth model by allowing incumbents to undertake innovations to improve their products, while entrants engage in more “radical” innovations to replace incumbents. Our model provides a tractable framework for the analysis of growth driven by both entry of new firms and productivity improvements by continuing firms. Unlike in the basic Schumpeterian models, subsidies to potential entrants might decrease economic growth because they discourage productivity improvements by incumbents in response to reduced entry, which may outweigh the positive effect of greater creative destruction. As the model features entry of new firms and expansion and exit of existing firms, it also generates a non-degenerate equilibrium firm size distribution. We show that when there is also costly imitation preventing any sector from falling too far below the average, the stationary firm size distribution is Pareto with an exponent approximately equal to one (the so-called “Zipf” distribution”).

http://lawprofessors.typepad.com/antitrustprof_blog/2010/10/innovation-by-entrants-and-incumbents.html

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