Innovation Flashcards
what is process/product innovation
Process innovation: Investment in labs for cost reducing technologies for producing a certain product
Product innovation: search for new technologies producing new products
what market structure is best for innovation? explain
‘perfect competition has no title being set up as a model of efficiency’
Competitive monopolistic firms / dynamic competition have more incentive to invest in R&D through the threat of competition. By reducing costs, they can earn greater profits
take Microsoft windows as an operating system (little innovation) as monopoly enjoys monopoly power (limited threat) compared to microsofts XBOX in a highly competitive industry where R&D is important in gaining competitive edge
what is the replacement effect?
firms with large market power are less incentivised to innovate as they have more to lose. e.g. by innovating, the monopolist cannibalises its own profit by producing a superior version of its product
what is creative destruction?
Dynamic competition is optimal with a small degree of monopoly power
Temporary market power due to innovation, competitors will come in and reshape market
dynamic process in which new innovations and technologies replace outdated ones, leading to the destruction of existing economic structures and the creation of new ones.
What is the efficiency effect?
incentive to invest in R&D in abid to deter entrants and defend dominant position
generally speaking monopolies have more to lose from innovation. Consequently monopolies are willing to ay more for patents than entrants under a 100% probability of a new entrant - unless the entrant brings a highly differentiated product
however, should there be significant uncertainty about the presence of a new entrant, the willingness to pay for innovation decreases (%) x WTP
who is more likely to pay for a patent of drastic innovation (I or E)
E - entrant WTP monopoly profits to replace monopolist incumbent . Incumbent only WTP a % of monopoly profits
who is more likely to pay for a patent of non-drastic innovation (I or E)
I - incumbent has more incentive to secure its position
what is the socially optimal solution under the innovation race?
socially optimal if only one firm oprts to invest in R&D however, if costs are low and probabilities high, both firms are likely to undertake leading to market failures
from a societal POV the cost of duplicating R&D is larger than the social benefit of increased likelihood of innovation discovery
why might a market fail if both firms undertake R&D investment?
firms dont take into account how their R&D investments affect its rivals
what does competetion intensity depend on?
number of firms
product differentation
type of competition
what is the objective of Intellectual Property protection?
promote innovation, grant exclusive rights to work or knowledge all while balancing a fostering environment for innovation and socially optimal effeciency
what is the difference between a patent and a copyright?
patent tends to inventions, business methods, formulas, technological process etc
copyright tends to art pieces, designs, books etc
both have different range of protections but overall remain similair
what if a patent is too strong?
more valuable to the holder, provides greater incentive to innovate but restricts competition in a post innovation market
when is it optimal to liscence a patent
never in bertrand - no incentive to share discoveries
always in cournot, given a royalty or fixed fee is charged equal to the amount of cost reduced. more socially efficient and more profitable for the patent firm
(not profitable to licence when a monopolist)
