Question

Show graphically a case where increasing the number of firms can speed up the arrival of innovation. Show a case where it can slow the arrival of innovation down. What is the key difference in terms of firm level incentives from adding additional firms in each scenario?

Answer 1

In an environment where competition in the market is very less, there is restricted Innovation involved in the product design, promotion and marketing , this is because few fioms enjoy a large market share and no ferm has a fear of losing market share. This makes firm less innovative and more prone to strategic pricing, under cutting and other straged strategic modes of planning. 1. When competetion is fierce, the profit shores are negligible and each firm has a smaller market share the tendency of Capétalest enrerprenent to chave for more profit encourages more innovation and this positively influr cences the market and helps consumes with wide variety of products. Hence the incentive reived by a from from entering a market with very firms is a large share of profet if it is able to drive customers to its products which It can by introducing more innovative products. Note that there is a destinction between the capacily for Innovation and the motivation for innovation that are provided by incentives. See that large forms are more capable of doing R&D so they can conduct more Inovation. On the other hand, large floms do not have sufferent Incentives to innovate because they bear a smaller CSloss in case they do not innovative and Smaller fform dees