Week 6 Flashcards
What is the difference between drastic and non-drastic innovation?
-Drastic innovation reduces costs to an extent where the firm can set a monopoly price below the marginal cost of its competitors (pm<c0)
-Non-drastic innovation reduces the costs but if firm sets monopoly price, it can be undercut by others (pm>c0)
What is competitive advantage and creative destruction?
Competitive advantage arises from a firm’s entrepreneurial ability to exploit market shocks and discontinuities… via innovation (firms must innovate to exploit shocks to create economic profit in the next period of relative stability)
Creative destruction describes technological shocks displacing established competitive advantage, innovators creating competitive advantage and economic profit in the future and there is the strategic impact (my innovation will impact your existing advantage, decisions, etc)
Describe patents and explain their impact:
A patent is an intellectual property that gives the owner its exclusive right to the invention, allowing them to monopolise
They are a measure of innovative output and demonstrate a ‘winner takes all’ game
The best response is where e1=e2=R
Are small firms better innovates than large firms?
Potentially, as large firms can suffer from x-inefficiency and smaller firms could be more ‘hungry’
However, larger firms do have some advantages: larger firms can spread the fixed costs over a larger scale, can leverage innovation across markets, are more diversified and can take on more risks and may have fewer competitors who can imitate the innovation
Explain the differences between incumbent and new firms when it comes to innovation:
Incumbents may be locked into their inferior technology due to sunk costs, meaning they are less likely to adopt the new technology
What is the relation between fundamental and incremental innovation?
Fundamental innovated drives more incremental progress, e.g: the internet
