Chapter 15

Question 1

product-improvement innovation

Answer 1

= higher willingness to pay

Question 2

cost-reducing innovation

Answer 2

= lower marginal cost

Question 3

Schumpeter Mark I

Answer 3

the idea that small entrepreneurs are the main engine of innovation

Question 4

Schumpeter Markt II

Answer 4

the idea that large corporations are responsible for disproportionate fraction of all innovation

Question 5

relation between market structure and innovation rate is shaped like…

Answer 5

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)

Question 6

creative destruction

Answer 6

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.

Question 7

dominant firms

Answer 7

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

Question 8

adoption of innovative products

Answer 8

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)

Question 9

fraction of firms adopting innovation (formula)

Answer 9

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

Question 10

word-of-mouth communication and S-shaped diffusion paths

Answer 10

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.

Question 11

knowledge diffuses over…

Answer 11

…time and space

Question 12

Defense versus attack innovation strategy

Answer 12

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

Question 13

Markets for technology

Answer 13

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

Question 14

joint profit effect (preemption effect)

Answer 14

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

Question 15

replacement effect

Answer 15

It indicates the lower incentive to innovate that a leading firm has, as compared to an entrant, when the innovation is drastic

Question 16

incumbents tend to invest (1) in gradual innovations, while entrants are (2) of drastic innovation (consistent with creative destruction model)

Answer 16

1. more

2. main source of

Question 17

difference between investment and efficiency of R&D

Answer 17

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

Question 18

organizational inertia

Answer 18

= the tendency of a mature organization to continue on its current trajectory
important in determining the patterns of R&D investment

Question 19

purpose of patent system

Answer 19

reward innovators

Question 20

trade-off from granting more valuable patents

Answer 20

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

Question 21

Novelty

Answer 21

in order for an invention to be patentable it must be “new” as defined in the patent law

Question 22

Nonobviousness

Answer 22

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

Question 23

an optimal patent system…

Answer 23

…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

Question 24

patent thicket

Answer 24

a long list of patent rights that those seeking to commercialize a new technology must deal with
problem: patents are sometimes very vague

Question 25

patent trolls/patent-assertion entities (PAE)

Answer 25

corporations whose primary assets are patent portfolios and whose primary business model is to generate revenues by licensing and by suing alleged patent infringers

Question 26

patent pool

Answer 26

an agreement between two or more patent holders to aggregate some or all of their patents for the purpose of cross-licensing

Question 27

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.

Question 28

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

Answer 28

because of spillovers, R&D results may become public knowledge
by cooperating with competitors, you can hinder them to profit off the knowledge