UE 4: The Microeconomics of Decision Making for Innovation

Question 1

What two things does technological innovation respond to?

Answer 1

1. Technological push: progress in scientific or engineering knowledge that reduce costs or make new products/processes possible
2. Demand pull: market expansion in the respective area so revenues can exceed costs

Question 2

How do investment and demand influence innovation according to Schmookler (1966)?

Answer 2

• Changes in innovation are correlated with changes in investment.
• Changes in investment precede peaks and valleys in innovative activities.

Higher demand:

• More people are engaged in production, leading to the likelihood of chance inventions increasing
• Higher profitability for inventions, leading to higher incentive for inventions

Question 3

What are three strategies firms could use to cope with uncertainties regarding the R&D process?

Answer 3

1. To delay the start of an expensive development until its costs have decreased enough to expect positive profits
2. To go to the next step of development if the previous ones resolved the relevant uncertainties
3. To start several different approaches of development simultaneously

Question 4

How does competition effect the cost and benefit curves through innovation scheduling decisions?

Answer 4

Firms need to decide when to start a development and how to set the schedule (how fast and cost-intensive). But competition pushes innovation to earlier point with lower profits. Innovators gain larger market shares that may be maintained to some degree.