Chapter 15 Flashcards
product-improvement innovation
= higher willingness to pay
cost-reducing innovation
= lower marginal cost
Schumpeter Mark I
the idea that small entrepreneurs are the main engine of innovation
Schumpeter Markt II
the idea that large corporations are responsible for disproportionate fraction of all innovation
relation between market structure and innovation rate is shaped like…
an inverted U
innovation rates decline as the industry becomes very close to perfect competition (one end of the inverted U) or very close to monopoly (the other end of the inverted U)
creative destruction
describes the deliberate dismantling of established processes in order to make way for improved methods of production
it implies that the optimal system is one of dynamic competition where, in the short-run, there will always be some degree of market power, however.
dominant firms
looking at innovation-intense industries, neither monopoly nor perfect competition provide a good characterisation
one or two dominant firms that compete with a host of smaller ones
not clear whether giants provide a positive or negative incentive for innovation effort by midgets
adoption of innovative products
adopters are not equal, they differ in size
as the cost of adopting decreases over time, more adopters decide that its time to make the switch
(S-shaped curve)
fraction of firms adopting innovation (formula)
x = 1 - F (c / γ)
F (s) is the cumulative distribution function of s, that is, the probability that a given firm’s size is lower than s
word-of-mouth communication and S-shaped diffusion paths
initially very few people know about x, so there re few “mouths” talking about it
conversely, if most people have adopted x, there are few “ears” to hear about it.
knowledge diffuses over…
…time and space
Defense versus attack innovation strategy
defense: prevent imitation by establishing and defending property rights
patents and secrecy: strategies for protecting intellectual property (IP)
attack: maintaining leadership by constantly improving their product offerings and production processes
Markets for technology
division of labor between the creation and the deployment of innovation
technology transfer is a better strategy in a market with well-defined property rights and if product market entry costs are very high
joint profit effect (preemption effect)
Leading firms have a greater incentive to innovate when the threat of competition by a laggard is high
if the total industry profits under duopoly are lower than total industry profits under monopoly, then the monopolist has more to lose from letting go of its position than the entrant has to gain from challenging it
replacement effect
It indicates the lower incentive to innovate that a leading firm has, as compared to an entrant, when the innovation is drastic
incumbents tend to invest (1) in gradual innovations, while entrants are (2) of drastic innovation (consistent with creative destruction model)
- more
2. main source of
difference between investment and efficiency of R&D
there may be a difference between the amount each firm invests in R&D and the actual rate of innovation
firms may differ in their R&D productivity
organizational inertia
= the tendency of a mature organization to continue on its current trajectory
important in determining the patterns of R&D investment
purpose of patent system
reward innovators
trade-off from granting more valuable patents
increases innovation incentives (higher rate of technical progress in the long run) but may also increase market power, resulting in a lower degree of economic efficiency
Novelty
in order for an invention to be patentable it must be “new” as defined in the patent law
Nonobviousness
the subject matter wishing to be patented must be sufficiently different from what has been used or described before that it may be said to be non-obvious to a person having ordinary skill in the area of technology related to the invention
an optimal patent system…
…balances the benefits from greater innovation incentives against the potential costs of increased market power; and the benefits of disclosing the state of the art against the cost of hindering follow-up innovations
patent thicket
a long list of patent rights that those seeking to commercialize a new technology must deal with
problem: patents are sometimes very vague
patent trolls/patent-assertion entities (PAE)
corporations whose primary assets are patent portfolios and whose primary business model is to generate revenues by licensing and by suing alleged patent infringers
patent pool
an agreement between two or more patent holders to aggregate some or all of their patents for the purpose of cross-licensing
poorly defined patents, as well as complex systems of complementary patents, create incentive problems for innovators. Patent pools alleviate some incentive problems but may create additional ones.
Interim R&D agreements may have the virtue of alleviating the free-rider problem. However they may also increase the degree of product market collusion
because of spillovers, R&D results may become public knowledge
by cooperating with competitors, you can hinder them to profit off the knowledge
