Comments for What is the link between competition and innovation?

What is the link between innovation, and competition?

If this is not one of the most controversial questions ever, I don’t know what it is.
In able to give a solid response, I had to do a lot of researches, and I found out that it is not only me to which it was confusing to establish a fixed opinion in the matter, for exemple the early empirical literature, inspired by Schumpeter [1943], estimated linear cross-sectional relationships and typically found a negative relationship between competition and innovation, confirming the theoretical prejudices of the era while researches since then had returned to estimating linear specifications, Nickell [1996] and Blundell, Griffith, and Van Reenen [1999] did found a positive linear effect of competition on innovation.

Now the way I see it, the link between innovation and competition is a positive one. In fact, if it is not for the competition between firms, they won’t be innovative in the first place:
First , Firms’ being in competition is healthy for them because when they are always number one or the only one innovation tends to be ignored but if there were many competitors on the stresses, they always try to bring the best out of them, and by doing so they are identifying their strengths and weaknesses because competition makes them concentrate and narrow their focus on what they‘re good at, and in the same time they are able to learn from their the others , this way they manage to decipher the strategies that can out run their business and they work harder and they became better .

Second , We can see the how positive the link between competition and innovation in the fact that it is even good for us as customers because we get to choose the best product with the price that suits us best and get a better customer service because when the firm is playing in an empty playground there is no enough time for it to satisfy every costumer’s need but when they is competition , all customers count and they are given all the attention and appreciation they need to stay faithful to the firm’s products whatever happens. While doing my researches, I found out that 89% of customers stop buying from companies after experiencing poor services; Also, improving costumer services can save their money and according to New voice media, companies lose more that 62 billion dollars due to their poor service.

Finally, competition makes it easier to think outside the box and come up with better ways to add value, but of course it is not that easy: according to some surveys results I read , most obstacles to innovation that firms deal with are related to the high cost of being innovative, the lack of financing, and the economic risk because large firms have more chance to be innovative because they can invest and spend great amounts on their R&D department and this is truly what gives them the only advantage.

https://dash.harvard.edu/bitstream/handle/1/4481507/aghion_invertedu.pdf?sequence=2
http://www2.aueb.gr/conferences/Crete2015/Papers/Petropoulos.pdf
https://clearaction.com/10-tips-customer-experience-innovation/
https://www.ameyo.com/blog/innovative-customer-service-ideas

It is hard to discociate these two element when we are speaking about development. Competitivity is mostly the result of innovation between compagnies bringing a better well being and growth for the rest of economy.

However as it said in this article the innovation has its limits in terms of benefits the compagnies can have from their effort in R and D but more generarly his limits depend on the position of the compagnies in the market.

The problem of capacity to innovate concerned more the smallest compagnies and big compagny can be a response to this.

Like it is said in the article, innovation brought by bigger compagny , for a small compagnies who don’t have the capacity to innovate is a boon. It allow them to avoid cost of research, benefit from economy of scale and productivity and it gave them chance to steal customers from the concurrence, even if they have less ressource than bigger compagnies, their smaller organisation allow them to be more reactive with the demand of the society . It has too, benefit for consumers and a good one, the reduction of price.

The incentive to innovate is, here, concernig the biggest compagnies

– A big compagny who is a leader of his market can be bring to reduce their research in R and D . in deed at his position, the R and D will only profit to concurrency who will use the new technology to develop themself and take markets parts. So it can be understandable that big compagny stop invest and rest on his capacity to product at a low cost .But before being a big compagny, these last has profited on the technology from the biggest in order to develop. it’s a cycle that must be maintain to create growth in a society.

In conclusion we can see that innovation and competitivity are a must have in order to develop the well being of the society and can’t be separated. they need to be still present whoever the weight and the place of the compagny. Innovation is required in any case because it allow not only the development of compagny but the development of the well being of the society

« Competitivity is not just about the cost of labor but also depends on the capacity for innovation, research…» Jacques Attali.

Quel est le lien entre compétition et innovation ?

Tout d’abord, une innovation est le fait de créer quelque chose qui n’existait pas avant ou du moins de différent de ce qui existe déjà. C’est devenu une vraie stratégie pour la plupart des entreprises, qui considèrent que l’innovation est nécessaire au bon fonctionnement et à la pérennité de l’entreprise. Ce désir d’innovation est notamment poussé par la concurrence qui est présente sur le marché.
Il y a cependant différentes concurrences et donc différentes situations de marché, mais toutes poussent plus ou moins à l’innovation. Il y a les situations de forte concurrence, c’est le fait d’avoir un marché avec un nombre important de concurrents, les consommateurs ont donc le choix. Pour se différencier, les entreprises devront donc proposer des produits ou des services nouveaux, et pour cela devront innover.
Certains marché comme celui des hautes technologies est un marché où la concurrence est réduite (Apple, Samsung, Microsoft,…), en revanche dans cette situation on s’intéressera vraiment aux produits proposés. Dans ce secteur, les consommateurs seront très attentifs au moindre changement et à la moindre innovation. Les entreprises devront donc constamment innover pour ne pas perdre leur clientèle voir même en attirer venant d’autres entreprises.
La concurrence est nécessaire à l’innovation comme le disait Steve Jobs, car on ne peut pas chercher à s’améliorer si on est la seule entreprise sur le marché, ou du moins de manière moins efficiente.
On peut donc en déduire qu’il y a un fort lien de corrélation entre la présence de concurrence et le degré d’innovation sur un marché, ce degré dépendra donc du secteur d’activité des entreprises et de leur environnement.

What is the link between competition and innovation?

Tout d’abord, l’innovation c’est l’action d’innover, c’est-à-dire d’introduire quelque chose de nouveau en terme d’usage, de coutume, de croyance, de système scientifique…
En matière économique, l’innovation est une évolution significative d’un produit, d’un service ou d’un processus de fabrication qui apporte quelque chose de nouveau, d’encore inconnu ou qui utilise une technologie nouvelle issue de la recherche fondamentale.

La concurrence quant à elle, est une compétition, une rivalité entre des personnes, des entreprises, etc., qui ont le même objectif, qui recherchent le même avantage.
En matière d’économie, la concurrence est une forme d’organisation sociale des relations où domine un souci d’égalité des positions dans la relation économique entre celui qui offre (vendeur) et celui qui demande (acheteur).

Nous savons que l’innovation est le moteur de la croissance de l’économie. Cependant il faut la préserver afin que les économies continuent de croître. Pour cela, nous avons créé les autorités de la concurrence. Ces dernières ont pour principal objectif de maintenir la concurrence sur le marché car selon elles, celle-ci est nécessaire pour l’activité d’innovation.
Elle encourage l’entrée de concurrents et parce qu’elle maintient des firmes actives, elles les obligent à innover pour survivre à la compétition. Tout le monde ne partage pas ce point de vue, notamment Schumpeter qui, en 1943 stipulait déjà à cette époque, que la concurrence était néfaste pour l’activité de R&D, puisqu’elle dissipait la rente qu’espérait obtenir l’innovateur

Schumpeter considère en effet que l’innovation est temporaire. Une fois son cycle finit, une innovation fondamentale apparaît, et autour d’elle se développe une grappe d’innovations incrémentales, qui ainsi associées permettront de créer un nouveau bien ou un nouveau procédé. Ceci explique bien le terme de « création destructrice ». Autrement dit, une innovation en remplace une autre.
L’innovateur qui investit dans la recherche et le développement, le fait espérant ainsi obtenir une rente de monopole, lui permettant de recouvrir les coûts engagés et de faire un bénéfice. Aussi pour Schumpeter, la concurrence est néfaste pour l’innovation car elle va réduire la rente de monopole et donc l’incitation à innover.

Arrow, fait lui aussi son analyse et développe la notion de « théorie de remplacement », L’effet de « remplacement » présenté par Arrow, stipule que le monopole (exemple de Windows dans ce document) incite moins à innover qu’une entreprise en concurrence, car la différence de profit est moindre. Autrement dit, la concurrence favorise l’innovation.
Cette vision est opposée à celle de Schumpeter.
Arrow démontre, contrairement à ce que stipule Schumpeter, que l’incitation à innover est plus grande dans un marché concurrentiel que dans un marché en monopole. En effet, plus l’intensité de la concurrence sera élevée, plus les entreprises seront incitées à innover pour survivre et rester sur le marché.

De nombreuses conditions limitent l’efficacité de l’activité d’anticipation. L’analyse effectuée dans cette étude montre qu’une firme en place peut maintenir son pouvoir de monopole en dépit de l’entrée de concurrents potentiels. Cette conclusion est en accord avec les travaux de Williamson, mais les raisons sont différentes. Pour ce dernier, la persistance du monopole est due aux imperfections du marché.

Pour conclure, nous pouvons voir que la concurrence n’a pas forcément d’effets néfastes sur l’innovation comme nous le démontre Schumpeter, par exemple, l’arrivée de Free sur le marché de la téléphonie mobile aurait en réalité bien des vertus sur l’économie du secteur. Selon une étude, l’impact de la concurrence permettrait une accélération des investissements et serait moteur pour l’innovation. Cet exemple renforcerait dont l’analyse de Arrow.

Sources:
http://www.educ-revues.fr/ID/AffichageDocument.aspx?iddoc=34763
https://www.cairn.info/revue-horizons-strategiques-2007-2-page-156.htm

Il est vrai qu’énormément de variables rentrent en compte dans l’établissement d’un lien entre l’innovation et la compétitivité des entreprises:
-la conjoncture économique (crise ou croissance économique?)
-la taille de l’entreprise (PME ou Multinationale?)
-l’intervention financière de l’Etat dans certaines entreprises (pour développer leur R&D)
-le prix des brevets à déposer pour les innovations produites?
….
J’aimerais aborder le secteur des téléphones et notamment l’arrivée d’Apple sur le marché. L’innovation induite par Apple, la production de nouveaux téléphones concentrés en nouvelles technologies (écran tactile, 3G, nouveaux logiciels…), les “smartphones”, n’a t-elle pas provoqué une explosion de compétitivité sur ce marché?
Des firmes assises sur le secteur depuis des décennies (Motorola, Nokia, Samsung..) ont dû s’adapter et courir après l’innovation afin de rester compétitif sur le marché, sous peine de voir leurs parts de marché et leurs profits réduits à néant.

Si l’on reste sur le cas de l’innovation en cas de quasi-monopole comme, Microsoft dans cet article, il est vrai qu’une innovation majeure de la part de l’entreprise, pourrait rendre obsolète tous ses anciens produits. Encore faut-il pouvoir produire et distribuer cette innovation afin de remplacer les générations précédentes et conserver cette situation monopolistique.
Et si c’était une autre firme qui réalisé cette innovation? Cela ne pousserait-il pas Microsoft à redevenir compétitif par le biais de l’innovation?

Comme l’explique l’article le lien entre compétition et innovation fait partie d’une doxa économique dont l’affirmation sur le plan théorique ne se vérifie pas toujours dans les faits, particulièrement en ce qui concerne les créations intellectuelles.

Le marché des jeux vidéos aux Etats Unis dans les années 1980 est un exemple typique d’un marché compétitif sans innovation.

Nous sommes à la fin des années 1970. La firme américaine Atari domine le marché américain et engrange des bénéfices records si bien que de nombreux acteurs décident d’investir l’industrie vidéo-ludique.
A cette époque le business model consiste pour ces entreprises à créer une plateforme (ou console) ainsi que les jeux qui y sont destinés sous forme amovible (cartouche de jeu).
Cependant les équipes de conception et de production de jeux (développeurs et éditeurs) sont alors de simples maillons de l’entreprise et ne profitent pas des retombées financières que connaissent leurs créations.De plus ils ne sont même pas mentionnés dans les modes d’emplois ni même dans les crédits des jeux. En 1979, une partie des salariés d’Atari soucieux d’être considérés, à l’image de l’industrie du cinéma, comme créateurs d’œuvres intellectuelles, décident de créer Activision, premier éditeur tiers. L’entreprise gagne son procès l’opposant à Atari et la jurisprudence fixe alors une nouvelle norme dans le secteur: désormais tout à chacun peut produire des jeux sur la plateforme de leur choix.

On peut donc dire que ce marché était intégralement concurrentiel, aussi bien du point de vue des fabricants de consoles que de celui des jeux.
Tous les prérequis théoriques étaient donc réunis pour favoriser l’innovation par la compétition. Néanmoins en 1983 c’est l’ensemble de l’industrie vidéo-ludique américaine qui a failli péricliter en grande partie à cause du manque d’innovation…

En effet suite à cette nouvelle jurisprudence les éditeurs se mirent à pulluler, désireux de se tailler une part du gâteau. Dès lors on assiste à une explosion du nombre de jeux mis sur le marché la plupart étant des copies à peine modifiées de jeux déjà existants (on retiendra la série des Pac Man exemple du genre),la protection et l’encadrement de la PI sur ce type de contenu étant alors limité .
Le phénomène est amplifié par le système de distribution des jeux: si les détaillants n’écoulaient par leur stock au tarif en vigueur (alors aux alentours de 35$) ils les renvoyaient aux éditeurs qui en échange leur fournissaient de nouvelles cartouches. Très vite les éditeurs n’ont plus été capable de renvoyer assez de nouveaux jeux aux détaillants et ces derniers ont cassé les prix afin de se débarrasser des invendus. Les nouvelles créations étant elles-mêmes des copies des anciennes les consommateurs ne renouvelaient leur bibliothèque qu’avec des jeux à bas prix, disponibles en grande quantité.
En moins de trois ans la plupart des éditeurs ont dû cesser leur activité et dans leur sillon les constructeurs de consoles, ne parvenant plus à proposer un catalogue de jeux assez varié et de qualité.

Les jeux vidéos vont être à ce moment considérés comme une mode éphémère et les vendeurs commencent progressivement à retirer les produits vidéo-ludiques de leur rayon à partir de 1984.
Après avoir subi des pertes financières catastrophiques Atari se reconvertit dans le marché Micro-ordinateur et enfouit près d’un million d’invendus dans le désert du Nouveau-Mexique. Il faudra attendre 1987 et la création d’une filiale américaine par le japonais Nintendo pour que l’industrie du jeu vidéo sur console renaisse outre-atlantique.

Le krach du jeu vidéo de 1983 est donc un exemple de marché ou concurrence n’est pas synonyme d’innovation. L’innovation, en particulier sur les marchés à forte composante technologique se doit d’être une priorité moins dans le but d’écraser la concurrence que d’assurer la pérennité même de ce marché.

Pour le jeu vidéo l’innovation technologique n’est cependant pas suffisante pour justifier un nouveau débouché économique. C’est ce que montre le modeste succès actuellement rencontré par la réalité virtuelle. En effet, aussi révolutionnaire soit l’innovation technologique, sans qualité artistique ni technique (au sens du gameplay, c’est à dire l’éventail et l’intégration des interactions possibles entre le joueur et le jeu) cette dernière ne peut justifier à elle seule un nouveau paradigme économique dans le marché du jeu vidéo.

Pour conclure, les théories micro-économiques spécifiques à certains marchés ou à certaines époques n’ont pas pour raison d’être systématiquement généralisés, pour avoir une idée pertinente et claire des interactions de liens de causalités au sein d’un marché, on ne peut échapper à une étude exhaustive et approfondie de ce dernier. Il faut procéder au cas par cas.

Sources:

http://lasagadujeuvideo.over-blog.com/dossier-n-1-le-krach-du-jeu-vid%C3%A9o-de-1983

http://www.lemonde.fr/pixels/article/2015/09/04/la-crise-du-jeu-video-de-1983-va-t-elle-se-reproduire-avec-un-indiepocalypse-de-2016_4745640_4408996.html

http://www.jeuxvideo.com/news/710213/micro-transactions-le-modele-economique-qui-monte.htm

http://tvtropes.org/pmwiki/pmwiki.php/FrNotesUtiles/KrachDuJeuVideoDe1983

The “Innovators Dilemma” is a highly interesting topic and plays an important role in nowadays entrepreneurial dominated environment, where business innovations arise frequently and large institutions put more and more resources into R&D, in order to keep up with the pace of small start-ups.

For a better understanding, I would like to split the discussion in its two main components: Innovation and Competition.
Let’s start with the latter one – Competition. As proverbial known “competition is good for business”, competition is mainly a strategically issue within institutions. Often companies talk about differentiation strategies, disruptive strategies etc.
However, if we look at the corporate landscape today, competition is no real competition anymore. For instance, in the automobile industry, it’s common practice among carmakers to exchange information about target markets, manufacturing processes (e.g. revers engineering) and future models.
When looking at those facts, it seems that companies already have a pretty precise view on what their main competitors are currently doing or planning to do in the near-term future.
Now, where does innovation fit in this whole picture? And how does the existing innovative environment affects todays competition?
Having a quick look at the glossary (businessdictionary.com), innovation is defined as a “process of translating an idea or invention into a good or service that creates value […]”. Accordingly, innovation seems to be a new strategy for companies to compete with their peers. Now, who will be in charge of this innovational process?
In my opinion the way innovation is executed today is simple, but purely rational and logic out of corporate view: Entrepreneurs, start-ups and inventors come up with new ideas and business opportunities, that (usually) specialize in one of the existing business areas of larger corporations (Example: FinTechs within the lending/banking sector). At a certain stage, those start-ups can decide on whether growing their business further (e.g. Tesla) or merge with a large institution.
We see a strong trend in the latter one: For example, tech companies such as Google, Facebook and Microsoft have a huge tendency to buy smaller companies to keep on track with quick changes in the industry and include them in their business activities.
At the European Innovation Day conference in Mountain View Alberto Onetti, Chaiman of the organizing company states:
“The common wisdom is that acquisitions have played a central role in Silicon Valley’s success, and that buying startups is one of the fastest ways for companies to embrace disruption and keep innovating“

Practically speaking, I believe that innovation is mainly driven by start-up companies in todays economy.
As the main blog article mentions, I fully agree that larger companies have less incentive to do innovation by themselves. Why? Because they would often run an enormous risk loosing their competitiveness against their rivals, if an innovation fails.
Thus, financially strong institutions screen the market for developing companies with new business opportunities and buy them, if they see a potential to enrich or replenish their business.
Additionally, speaking about monopolies: their unique position in the market is usually not sustainable in the long-term. Therefore, also those companies depend on innovation and cannot be excluded from the ongoing changes.

Lastly, in my opinion, the relation between competition and innovation is, that innovation is not done by corporates themselves, but helps them to be more competitive in their respective industry. The actual source of innovation is a pool of ambitious companies, that are flexible enough and less affected by competition than their bigger counter party.

For a large part of companies, innovate has become essential so as not disappear of the market. However, the process of innovation can create uncertainty. We can consider that innovation is linked to competitiveness. Indeed innovation improves competitiveness by increasing the quality of service or product. For example innovation provides a competitive advantage.

But this relationship can be tempered. The innovation allows to escape to competition when companies are almost identical. While companies who are lagging behind in the market will have no incentive to innovate because the chance of catching the leader decreases. But a firm with a high market power will deter the entry of rivals by preserving its market power by innovating.

The link between innovation and market power is complex because there are a many factors that may influence the invitation to innovate. the company must ask questions to them about the characteristics of inventions, the extent of competition before and after innovation, the R&D sector,…

Internal research to innovation remains the responsibility of large companies because this requires an important funding. The department of research and development must provide to the companies new knowledge and new concepts. If the post-innovation market competition allows to the company to take profit from their investments, thus the firms will invest in R&D.

The company Renault creates innovation function in addition to its R & D function in order to better manage its innovations. The automaker achieve considerable efforts around innovation. Renault create many vehicles with a quite concepts originals: Twingo, Scenic,…

sources:

http://www.anrt.asso.fr/fr/pdf/Atelier4_RID.pdf
http://www.oeconomia.net/private/cours/economieentreprise/fichedelecture/strategiesefficacite.pdf
http://eml.berkeley.edu/~gilbert/wp/competition_and_innovation.pdf

At first sight, I was really convinced that the more competition there is, the more firms will try to innovate. It is clear that a firm have to differentiate itself from the competitors. A well-known example is Nokia, in the world of smartphone that missed the boat. It is crucial for firms to stay competitive, to have a competitive advantage.

Moreover, with constant improvements in technology, firms have to follow this trend, in order to be up-to-date. However, it is not true that an innovation is always technological. An example of that is the well-known iPhone, which was obviously not revolutionary in terms of technology. There are lots of ways to innovate, not only in products but also in business models and processes. Actually, innovation is also linked with the strategy of a firm. For instance, it can help a company to enter into a new market.

I do think that big firms may not face the same degree of incentive than small firms because their products work well and because of a risk in innovation. The extreme situation of a monopoly does not bring a strong motivation to innovate because there is no need to differentiate itself. It is also obvious that innovate is strongly linked with a degree of risk because there are lots of uncertainties about a possible success. In other words, I believe that the most discouragement from innovation is the fact that firms can waste money if it do not bring to a success. It is also very difficult to encourage innovation after a failure but, in my opinion, I believe it is important to persevere because there are more failures than success.

However, there are some limitations to innovate. For instance, too strong competition can lead to a reduction in the means dedicated to innovation. Firms are sometimes not allowed to cut their cost more than they are currently without making losses. Furthermore, because too strong competition does not bring any profits, it is not possible to invest in R&D.

Determining how firms with a sound and dominant (if not monopolistic) position in the market innovate is a tough call. Apparently, at a first glance, there is no incentive to innovate at all, bringing us to the point of thinking that a lack of competition might cause a lack of innovation.
One clear motivation to this point of view is that a firm in such a position already has a consumer base that lets the firm just go on with its standard level of production (therefore limiting R&D expenditure to a minimum, as Arrow pointed out in “Economic Welfare and the Allocation of Resources for Invention”, dated 1962), making business without being bound to offer better products than its competitors. We have to consider that innovation is not a smooth, easy process, as Holmes, Levine and Schmitz showed in “Monopoly and the incentive to innovate when adoption involves switchover disruptions”. As a monopolistic firm operates on a fairly low level of produced units, the marginal cost of R&D could be unbearable, as the innovation process has not immediate healthy and useful effects, and subsequently cause a disincentive to further innovation. Moreover, a bold move could drastically change the consumers’ perception of the product itself, eventually even bringing to a sharp decline in sells, in favour of a substitute good (if any exists) or simply quitting buying it.
On the other hand, if the firm sells a very important good, which does not have a substitute, innovation could be taken into account. Schumpeter in “Capitalism, Socialism and Democracy” (1942) wrote about this very topic, pointing out that a monopolistic firm should use its position and capital power to enhance its production and push down hard on the innovation throttle, as the risks of a negative outcome would be absolutely rare and bearable, due to the market position.
So, how can we think of innovation in such a situation? An answer could be that of an opening of the market: if barriers to entry are low enough to let another (or multiple) seller to enter the market, that might be an incentive to develop something new to avoid being beaten by the newcomers. “The future of technology”, a book published by The Economist, cites as an example that several “disrupting” firms which entered some IT market (namely, the telephone and photocopies one, for example), exploited the lack of innovation by the established firms that were dominating the sectors, to the point of becoming the new leaders in the market. These episodes can be associated with the Gilbert-Newbery model (1982), which illustrates how a firm which operates in a monopoly is basically in front of a two-way fork: innovate or let (better, risking of letting) a possible rival to innovate.
This one is a clear example of an incentive for innovating, even when the firm is in a monopolistic market: otherwise, there is the risk of being challenged, maybe even to the point of being outdated and outperformed by a new and better technology. Of course, this argument applies only to markets that can open up to at least two actors: if a monopoly is not going to become a duo(or even an oligo-)poly, as Arrow assumed in his work, then the risk of being challenged is clearly non-existent.
Even if the debate is still somewhat opened between the opposite points of view (the one that comes from Schumpeter’s work and the one that derives from Arrow’s), at least to my eyes this is the most impellent reason for a firm to never settle and always try to invest in something new and possibly innovative. Of course, a monopolistic firm will most probably sell a number of goods such that the marginal cost of R&D will be higher than it would be in a competitive market, but going for a sound innovative process could nonetheless help improve the products and open up a future in which sales figures might grow and create a heathy “cycle”. Empirical evidence has actually shown that openness to innovation (i.e. limiting the use of patents and trying to spread the competition to greater levels) leads to a more flourish economic growth.

The link between innovation and competition may, at first, seem complex to assess. This is due to the fact that, to have a complete picture of a firm’s propensity to innovate, one must look at both the incentives and the capacity to innovate. These two aspects, according to many theorists, do not emerge from the same conditions.

On the one hand, Arrow (1962) stated that monopolies have less incentives to innovate, simply because monopolies produce less than when they face competition and thus have lower units on which to spread the fixed cost of the innovation. This was also supported in a paper of Holmes, Levine and Schmitz (2012). In their paper, they explained that, quite often, innovation is not a smooth process, but rather is subject to “switchover disruptions”. In a few words: new innovation can lead to major problems upon adoption, which can lead to a reduction of output and/or high fixed costs to suffer. And, as they very well explain in their paper, this decreases the incentive for monopolies to innovate: “[…] a competitor has little to fear from a disruption as they are earning little to begin with. A firm with a lucrative monopoly is well advised not to jeopardize it by adopting a technology that may in the short-run at least, threaten its lucrative position.”

On the other hand, Schumpeter (1942) argued that monopolies and innovation tune well with each other because monopolies have more capacities to innovate. Why? Because they are more qualified than smaller firms to integrate the return on the innovation. They have access to more funds, they can handle the inherent risk associated with new processes or products and a monopoly isn’t threatened by competitors who could try to adopt the innovation as well.

The two arguments both seem to make sense. However, in my opinion, they also both have some limitations. In particular, they both talk about monopolies. But what would happen in a market that is rather an oligopoly (so where the incentives would be higher than for a monopoly according to Arrow and Holmes et al.) and where the firms in this oligopoly are quite large (and therefore still have some of the capacities to innovate that Schumpeter mentioned)? It seems to me that, in this case, the two views are not as contradictory as it seemed before and thus that both arguments can be used to explain the rate of innovation in this market. In particular, one should except to see some emphasis on innovation in such a setting since both incentives and capacities to innovate are present.

To see if this is indeed true, I have looked after such a market which could provide an empirical support to my argument. The one I am going to refer to is the automotive industry in the United States. This industry is dominated by four manufacturers (figures of 2013): General Motors (market share of 17.9%), Ford (15.9%), Toyota (14.3%) and Chrysler (11.5%). This market can therefore be considered as an oligopoly, and each one of these four companies has a high enough size to be considered as a large company. What is the state of innovation in this market? According to report of the American Automotive Policy Council in June 2014: “Chrysler, Ford and General Motors, together, invest more than $13 billion in R&D every year. Each alone spends more on R&D than some of the world’s most famous technology companies.” Innovation is therefore an important part of the US automotive industry. It mainly drives the demand (sales have increased by more than 50% since the financial crisis) and permits them to make their production process more efficient and thus to put a downward pressure on costs (and therefore to remain competitive).

In conclusion, Arrow and Holmes et al. on the one side and Schumpeter on the other side do not especially have contradictory views on the link between competition and innovation, they are just referring to two distinct concepts: the incentives and capacities to innovate. Therefore, their arguments can both be correct in certain markets such as an oligopoly of large firms, and we should expect to see quite extensive innovation in such a competitive setting. The automotive industry in the US is one out of probably many cases that confirms this fact.

References:

[1] American Automotive Policy Council. (2014). State of the U.S. Automotive Industry. Retrieved from http://www.americanautocouncil.org/sites/default/files/State_Of_The_US_Automotive_Industry_2014.pdf

[2] CLEMENT, D. (2008). Creative Disruption. Consulted on 19/09/15 from https://www.minneapolisfed.org/publications/the-region/creative-disruption

[3] HOLMES, T., LEVINE, D., & SCHMITZ, J. (2012). Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions. American Economic Journal: Microeconomics, 4 (3), pp. 1-33.

[4] RITTER, D. (2014). The Auto Industry’s 5 Largest U.S. Market Share Shifts In 2013. Consulted on 19/09/2015 from http://www.cheatsheet.com/automobiles/the-auto-industrys-5-largest-u-s-market-share-shifts-in-2013.html/?a=viewall

In The Tract on Monetary Reform, John Maynard Keynes stated that “in the long run, we are all dead”. Although his original quote was making the case for government intervention, one can argue that it may also apply to monopolies lacking innovation.

When examining the issue of competition and innovation, we should remind ourselves that there has never been such a thing as an eternal monopoly in a market open to competition. Indeed, we can think of many historical firms who established themselves as an “invincible” monopoly in their market before enventually collapsing due to lack of innovation and the idea that they were “too big to fail”: IBM and General Motors are notorious examples of that phenomenon.

With this in mind, one can question the argument that monopolies have lower incentives to innovate than smaller firms. Indeed, the apparent protection offered by barriers to entry in the market always turn out to be an illusion over time and, in the end, monopolies seem to be faced with one tough choice:
– to not innovate and eventually collapse, due to the introduction of an incumbent’s superior, cheaper technology (low uncertainty – low payoff)

or

– to take the significant risk of innovating and cannibalising your business to firmly re-establish your position as the industry leader (high uncertainty – high potential payoff).

In this context, the affirmation that there exists a positive link between the level of competition and innovation does not sound very compelling. Monopolies that seek prosperity in the long run must realise that innovation is – at least in the long run – as vital for their survival as it is for firms in a more competitive market. They should therefore highly value innovation: after all, they are usually well equipped to manage innovative projects, as is mentionned above.

As the author states, it is very difficult to describe the connection between competition and innovation. Writers and experts have different opinions on the subject.

On the one hand, monopolist seems to have less incentive to innovate. From his position it does not seem to be reasonable to use resources to create something new, because there is nothing more to be won for him. However, in the real world we can observe complicated net connecting competitors, markets, suppliers, technologies etc. Therefore, monopolist on one certain market could be innovative in various ways in order to get new business. He could try to use capabilities gathered in his current business in process of new product introduction or find innovative way to manage the supply chain to decrease production cost. Also, innovation may allow the monopolist to get customers that were not even considered as they chose different products, but referring to the same need. For example, breakthrough in computer gaming industry could attract more people to spend their time playing games instead of use another means of entertainment. Moreover, organizational innovation may have impact on company’s operations and therefore profitability.

Also, I would like to mention the example of the monopolist – Aluminum Company of America used by Joseph Schumpeter. He argues that competition is an ever-present threat and the possibility of losing monopolist position may discipline the company and make it constantly innovate.

Competition seems to be a factor that usually makes companies innovate, but it does not always happen. For example, automobile giant General Motors may be reluctant to introduce its first electric car, even if the company considers electric vehicles as future of automobile industry. First problem might be that if the new technology does not conquer the market, then GM may lose much more than smaller competitors. Therefore, company might want to wait for market response and react adequately. The other reason might be that introduction of the new product puts in question the whole previous business based on gasoline or oil powered engines. Such significant change may cause problems with various stakeholders e.g. suppliers, labor unions, shareholders etc. Moreover, when the company considers the innovation to be easy to be copied by the competitors, it may not consider the profits from the innovation as high enough to make an effort to innovate.

Having considered all mentioned situations, it is hard to come up with one general solution to the problem. I believe that all situations should be analyzed separately. When we focus on certain market and companies present on it, we can be closer to the conclusion on the impact of competition on innovation.

The relation between competition and innovation is really complex and it’s not possible to say: “It must be that”.

First, competition is considered to have a real importance in the good economy’s functioning. Indeed, imagine we are not in a competitive market, profits for firms are higher than in a very competitive one but people have an incentive to enter into this market to also make big profits. Imagine now that we are in a very competitive market, profits will be lower but laggard firms will be discouraged to enter in this kind of market by the low profits. If competition increases, people have an incentive to innovate. Thus, the competition’s level can have a positive or a negative influence on innovation.

Secondly, innovation is the way to differentiate himself from others. On the one hand; for small firms, it’s obvious that they have to be more innovative than big one if they want to stay alive but the cost of R&D is important for these firms who don’t have much revenues. On the other hand, large firms have more to lose if they decide to innovate, as explained in the introduction. Industries have to check the pros and cons of each possibility but a firm who don’t innovate is doomed to failure.

Moreover, this relation is also influenced by strategic interactions between firms, market characteristics but mainly governments. Indeed, to regulate this debate, governments have launch, for example, the system of patents. It offers the innovation’s protection but it also maintains the competitiveness of finding another idea that will be better than the first. It’s just one example among other.

To conclude, these two concepts are very important for the economic welfare and depend on many factors. To make their business successful, it’s obvious that firms have to innovate and well analyse the market’s competitiveness in which they are.

I think the link between competition and innovation is real but it depends on many factors. A first factor would be the sustainability of the products on the market. Are the products sustainable or does the technology evolve constantly? If we are the leader on a market where the product doesn’t evolve, we have no incentive to innovate, just to keep producing the same product to keep our market shares (Blue ocean). But if the technology of our product evolves quickly, we have to manage to innovate before the others to keep our market shares (Red ocean). Managers must focus on short-term benefits but also on long-term benefits, which implies to consider that there is a constant danger that another firm innovate before you and steal all your market shares.

From this point of view, it is understandable that Microsoft doesn’t see any threats in its market because it is the monopolist. If Microsoft doesn’t innovate, nobody else will be able to introduce a new system and to implement it on all the computers served by Microsoft so why would they spend money and time in researching new innovations. The only incentive they have to innovate comes from the customer’s expectations because they must deliver a product that is adapted and which evolves with the customer’s needs and it is the same for all monopolists.

On the contrary, little firms that want to enter in the market face high competition and have to differentiate themselves by innovating and proposing new products. Innovating is the best way to remove entry barriers and take market shares in a short period of time.

The link between competition and innovation is a fact. During a speech for the Fordham Competition Law Institute Conderence in 2012 (http://ec.europa.eu/competition/speeches/text/sp2012_05_en.pdf), the European Commission states that the competition drives innovation because it forces the companies to cut their costs and therefore, to innovate.

The perfect competition is supposed to lead to a social optimum. It could be said that the innovation would also lead to social welfare, but it is not always the case.

Indeed, I think innovation cannot be only linked with competition; other factors, like taxes or externalities, can force a company to innovate or not. This is why the relationship between both is hard to explain. A lot of other dimensions are taken into account by companies to make their choice. As the market is not a lab, it is impossible to neutralize all the other factors and therefore see and understand the real relationship between both.

There are two ways to consider the link between competition and innovation. One is that competition has positive effect on innovation, the other is that competition has negative effect. Obviously, in the same period of time and the same economic environment, they cannot exist in the same time.

When we talk about competition and innovation, Apple and Samsung are always mentioned as good examples. We look back to last two decades, people only used basic cell phones but smartphones. At that time, Apple and Samsung worked in different electronic industry. Apple focused on personal computers. Samsung mainly produced household appliances. There were not almost any competition between them. However, with internet technology developing, they become each other’s the biggest competitor in smartphone field now. In this case, IT innovation stimulates competition.

However, in smartphones competition, it’s easy to realize that big companies have more superiority on innovation. Actually, in the US, Apple and Samsung have over 65% proportion of the smartphone market. Every years, Apple launches a new iPhone and Samsung also launches its new smartphones at the almost same time. Both of them have new innovation in their products. In this case, Competition stimulates IT innovation.

In a competitive market, Inter-stimulated relationship is between competition and innovation. And innovation is the only way to let which company can continually compete with other rivals. Last decade ago, Nokia was the No.1 mobile producer. You can its phones everywhere. Unfortunately, due to the evolution of phones, less and less people bought its phones and it has a great deficit over the ten years to early 2014. Eventually, it was bought by Microsoft. From this amazing news, we can understand that innovation is the most important measure on competition. As long as a company lost its own power to innovate, it would be soon obsoleted.

Innovation is such an important thing but not all of them can be accepted by the market. For instance, Galaxy Tab S, which is made by Samsung, has both tablet and smartphone functions. Even though people like a big screen, Galaxy Tab S is too huge to carry. So, the sales amount doesn’t reach the expected level.

In conclusion, innovation connects closely to competition. Innovation is the greatest motive power in competition. Under relatively fair competition (we don’t consider original capital), companies have more positivity to innovate. That is the reason why more and more products were created in faster and faster speed.

Reference:
http://en.wikipedia.org/wiki/Apple_Inc.
http://en.wikipedia.org/wiki/Samsung_Electronics
http://www.comscore.com/Insights/Press-Releases/2014/3/comScore-Reports-January-2014-US-Smartphone-Subscriber-Market-Share
http://www.bbc.com/news/business-23940171

For the past few decades (starting with works of J. Schumpeter and K. Arrow) the question of interaction and mutual influence between innovation and competition remains the focus of the analysis of economic growth, including research projects, current agenda of public policy, and the practice of innovation. The relationship between competition, innovations and economic growth in the different market types (monopoly, oligopoly, perfect competition) have been evaluated by various authors using both theoretical approaches and empirical data. Therefore the results of such researches are often completely contradictories.
From my point of view it’s not always the case that competition creates incentives for innovations. One of reasons of this statement comes from the nature of innovation. It’s always risky and costly to innovate, moreover firm never can be sure that it will receive enough profit. So in the situation with a lot of small competing firms one could find more reasonable not to take risk of innovation (and go bankrupt) but stay with not big but stable profit. In addition, as we can see from the article, small firms with low market power could simply don’t have capacities to innovate. Other point is once the innovation is in the market, competitors could find various ways to use it or simply to copy. This problems suggest that the right government intervention is needed to maintain incentives for innovation in the competitive market (such as subsidizing, creation of the strong legal defense for innovation etc.).
I believe that in monopoly situation firms have more incentives to innovate. One of the most important incentive is to avoid new firms entering the market. In the fast growth of informatization and globalization, monopolist with significant market power and large capacities risks to lose everything if its product stops responding constantly changing consumer demand. Another good incentive for monopolist to innovate is that normally it has nearly all the demand. It means that it risks less that innovation will not be consumed by its customers.
To sum it up, I want to say that competition on way or another affects the innovation process but the character of this effect varies depending on many factors and circumstances.

We may think that the relationship between competition and innovation is easy to find. Intuitively, we can say that the more firms you can find in a market, the more they will be in competition, and therefore, they will have an incentive to innovate. This statement is not true and the link between competition and innovation is much more complex than it seems.

First off all, the company size is an important factor. Innovations usually involve important research and development costs. These research and development costs are sunk costs because they do not vary by the quantity that is produced. It is easier for a large company to spend money in research and development because large companies have more financial resources than small one. Moreover, a large company can also minimize risk by diversifying the research and development project. Finally, large companies will have more incentive to invest in innovation because the expected profits are more important. Indeed, larger firms produce usually more than small one. They have more customers, better distribution circuit, etc. For all these reasons, we can assume that the size of a business could be positively correlated with innovation.

Secondly, the market power concept is also important. Often, for an innovation to be accepted by the market and in order to make people use it, innovation must have a minimum number of people who use in the beginning. It is therefore important that the company has enough market power to impose his idea to market. For example, a new type of computer keyboard was invented a few years ago. This new type of keyboard allowed writing faster. The innovation was good but it was never adopted by the market because no firm has enough market power to impose this innovation. So people continue to use the old keyboard (azerty or qwerty) although new was better.

In conclusion, the relationship between competition and innovation is more complex than it seems. It strongly depends on many factors that are unique to each business, market, etc.

Even if I would intuitively say that less competition leads to less innovation, I don’t think we can say that there is only one of statement that is true. For me, it depends on the market we are looking at.

Let’s take a case were a firm is in a temporary monopoly, because of one major innovation they found, that is actually patented. They’re enjoying the monopoly profit, but when the patent will end, competitors will be able to enter the market. If they don’t innovate, they will lose market shares, so I think we can say that there is a certain incentive to innovate here.
Now, let’s look at a situation with a natural monopoly, and have no direct competitors. If everyone is used to a certain product, it has already been the case where a firm try to innovate, and consumers didn’t want to change their habits, and rather stay with what they were used to. Invest money to create something new would not be profitable in that case, and it’s an incentive to not innovate.

But without thinking about the market, I agree with the article when it says that we also have to think about the “capacity” to innovate, without only focusing on the “incentive” to innovate. Because there is certain situations where firms could have the incentive but not the capacity (market shares not big enough, not enough money to invest…) and also situations where it is the opposite (a situation of cartels/ tacit collusion).

How the article stated, we can differentiate the capacity and the incentives to innovate.
In the side of the incentives, after thinking about it, my common sense tells me: why would a firm, who owns all (or almost the entire) market, want innovate? Innovating has costs and also risks. Furthermore, the most of the profits obtained by introducing an innovation in the market will be cannibal rents for the monopolist, or what is the same, customers that the new technology have “stolen” to the old technology. Following this idea, the introduction of a new and novel product by a firm which enters in a perfect competitive market would have more benefits because all the rents obtained will proceed of the old technologies of other firms. Even so, the larger firms innovate.

In my opinion, an important factor that influence the more or less willingness to innovate is the market in which the firm operate. A market where the products get obsolete in a short period of time implies that the firm which at the present time is a monopolist can lose his dominant position if he does not invest in R&D. This kind of market press the monopolist to innovate and improve his products for fear of other firm take more market power. Ultimately, in these markets, innovating is not an option that you can decide not take if you want to be the leader.

To sum up, I have the solid opinion that the competitive markets are the perfect ground for innovation.

In my point of view, it’s impossible not to notice that there exist a positive correlation between competition and innovation. It could seems obvious, but I’d like to open my comment with a fact: competition drives innovation, in the making process of products and in products themselves.

There’s plenty of positive examples that illustrate how enforcing competition rules -whit that meaning a lot of different policies, from antitrust to the breaking down of the free market barriers- can support innovation. Liberalization is probably the most common one. In fact, it’s easy to notice how many improvements companies have made since a specific sector, let’s say telecommunications, has been open up to competition, and how much better off the consumers are.
Telecom is an often-used example, and the fact that the step was usually made from a monopoly to a good-grade of competition market makes it a perfect case-study.
Through a series of regulatory measures and antitrust enforcement, it was made possible for new companies to access the networks of incumbent operators (often monopolists), and that led to a rapid development of a wide variety of innovative technologies (the smartphone’s market is here to tell us how big the impact of those technologies has been).

Another good example of how innovation has been driven by competition is the transport sector, particularly the air-transport. Since low-cost companies entered the market, and enforced an undertaking policy, the incumbent firms were forced to response with lower prices and better services, both of which are the result of an innovation process (increased use of Internet in air travel services, newer and more fuel-efficient aircraft, construction of dedicated low-cost terminals).

On the other hand, cartels are a perfect example of how a lack of competition undermine innovation. When two or more firms create a cartel, the monopoly-like situation that comes up represent a significant obstacle to innovation, leading the firms to act irrationally when it comes to R&D -not to mention the drop in productivity by the cartelized firms- and often extend the life of obsolete products, again leaving the consumers worse off.
Another reason why cartels (the exact opposite of competition) harm innovation is that under a cartelized economy the entrance of new subject -frequently carriers of innovation- is artificially made hard by an unfair use of the power incumbents firms have.

So, in the light of what I’ve said, I think that to obtain and maintain an efficient economic system it’s fundamental to respect the rules of a fair competition. In fact, even if it’s true that competition drives innovation, it’s also true that enforcing the system of laws that regulates competition is the key to an healthy and well-functioning economy. An essential key-role is played by antitrust authorities, states’ policies in support to new and young firms facing the market and, last but not least -especially in the nowadays worldwide-connected economy- an efficient and integrated set of rules that applies for everyone, everywhere.

References:
International Antitrust Law & Policy: Fordham Competition Law 2012

When we talk about innovation, we talk about something new that is launched on the market. Something that others didn’t think about, a breakthrough among what already exists. Innovations are essentials for the welfare of economy and for the development of new ideas. But, when Innovations go up, more and more companies want to follow the trend and mimic what’s coming on the market. From this point we are wondering if innovate influence the competition of if compete challenge the innovation’s wave.

As far as I am concerned, the nature of the bond between competition and innovation stays completely vague and indefinable. Both have their influence on each other and try to find a dynamic equilibrium, but sometimes one takes the lead on the other.
However the situation often ends in the same way namely that large leader companies are always the ones that end up competing each other to get the most market share; while small businesses that can’t face these trendsetters try to survive in another way.
Indeed, large firms have all the financial resources they need to launch their innovations on the market. Moreover, due to their expertise and their huge amount of production, they have the possibility to be more cost effective than the small ones. Nevertheless, these last ones, thanks to their size and their influence, have pretty nothing to lose in case of failure; while large corporates bet their brand, their reputation and a huge amount of money on the table.

From the light of what I have just said, it seems, and especially in the 21st century, that the race for innovation rages increasingly heavy these last years; as well as competition between firms regardless their size. When a business tries to take the lead with an innovation, others compete fiercely to catch up it. Conversely, when there is a fierce competition between firms, it locks the market for smallest to let biggest fighting for the market.
It seems obvious that the link between Innovation and Competition is well present but to say that is positive or negative, I think it depends on the situation in where we are positioned.

Although the relationship between competition and innovation is not simple, it is possible to state that competition is the engine of innovation. Companies must learn to innovate efficiently to offer bring new products/services that meet the needs of the customers. It is necessary that the companies innovate, the world is moving very fast and every time people have new needs, that is why it is necessary for companies to develop new, improved and differentiate products.

In the business world, innovation is not made for fashion or for a will, but for necessity. The innovation is a determinant of the sustained growth of companies. They invest in innovation because it is the best opportunity to increase market share, reduce production costs and thus increase profits. Today, innovation is one of the most effective business strategies to achieve added value and to ensure the firm’s survival in increasingly demanding and global markets.

There are several reasons to suggest that innovation is a need for any company that aspires to continued success: It is important to note that customers become more sophisticated, they are not willing to resign higher levels of satisfaction. Also, some competitors are focused on imitation, implying decreasing profit margins. If firms do not offer new products, in the end of the day, they will go to bankrupt due the price competition. Moreover, in many cases the product’s life decreases while the costs are increasing, then this kind of firms could improve its business results by bringing new solutions (products) to market.

In this world, if you are not proactive then you must be reactive. If there are possibilities for innovation in the sector, surely it will be covered by someone, and then even more competitors could appear. This situation could be a great risk for the stability and survival of old companies. Then, the need to innovate it is very profitable, some studies show a relationship between innovation and better financial results.

The internationalization/globalization of markets, new technologies, opportunities and powers, are transforming markets and competition. Any change requires strategies to take advantages from this change. The increasing competition makes the innovation be a key aspect, because it should help to build competitive advantages. From here, we can claim that successful companies are characterized by innovation.

This question seems quite complex indeed. The number of different points of view can illustrate it. Like lots of question to which you would just say “of course!”, there is so much more to think about in order to find an appropriate answer.

Like said before, I think that several factors impacts this relation between competition and innovation and not in the same way. I will decline my idea of this link according to three factors that are the most critical according me; corporate culture and human resources and the strategy.
I won’t discuss the capacity question because I think that my point has already been made by the others (big firms benefits from bigger budget but today’s technologies make innovation reachable from most of creative and entrepreneurial companies).

So here are some elements to discuss the incentives a company has from its market situation:
– Every companies develops its own culture. This culture is a drive of beliefs and behaviors aimed to be shared by all the employees. That means that, whatever the market looks like, the culture will determine the level of innovative production. Furthermore, as the firm has a monopoly position, it can tend to have a complacent behavior as explained in Tushman’s paper : “Ambidextrous organizations”. Then, culture is printed by a kind of autosatisfaction that keep the company in a bubble, ignoring the market and eventually, at some point, competitors invade the market and its to late.

– Changes are challenging and pushes employee’s comfort zone. Human resources are therefore essential to be innovative and compete. According to their reaction to changes, a firm can be either defensive or offensive. When your managers are dynamic, looking to renew themselves and to have an impact, your company is offensive and won’t wait for competitors to express their entrepreneurship. In a defensive atmosphere, competition will be a trigger to innovate.
This defensive / offensive side can be also defined in the company strategy; innovation can be one the goals. It then leads to aligning the whole organization in the idea to “be innovative”. Again, in this case, it is important to keep being cutting-edge no matter the economic environment.

In conclusion, I would say that if innovation is one of a company features, then competition can have a slightly influence on their seek for innovation. In a more passive position, competitors can represent the incentive that we shake a company to reach a higher level of innovation, in the only goal to compete. In this last situation, I think that they ability to innovate is limited because of the state of mind.

Certainly the relationship between competition and innovation is complex. While basic economic intuition tells us, that more competition should lead to more innovation, the Schumpeterian destruction of incumbent’s profits, caused by him being innovative, is making it less attractive for him to innovate. Although he faces a threat, that his business will be captured by some other successful innovator, he has less incentive to innovate than the entrant. I believe, that the incumbent may have rather an incentive to minimize the possibility (that his business will be stolen) by other measures, than by being the first to innovate. To give an example, state level (or European level) industrial policy may provide such measures. Ultimately legislature can be manipulated by lobbies to provide environment, in which it is easier to conserve the market in the current state. The idea of an innovator, who is forced to innovate by the threat of his competition, is appealing, but it may be only a small part of the whole picture.

Altought the highlight of the texte express the link between competition and innovation, in my meaning there is no real empirical link between them because of the to large numbers of factors to take into account. But if we simplify the problem some precision, remarks can be made.

As told in the paper, monopoles are often afraid about innovation because they already are in a leader’s position and don’t want to cannibalize themselves. Whereas on opposite side, small business have incentive to innovate to be able to compete with biggest company, To penetrate the market.

For me, the key of this problem lies not in competition, or in the size of the company, but more in the type of innovation they are looking for and in the capacity to be flexible, what means have an active R&D even if they don’t want to innovate, just to be able to react to market changes.
Indeed, assuming the 2 following types of innovations: Incremental, radical, different behaviours can be make:

First, “incremental innovation*” seeks to improve the systems that already exist, making them better, faster cheaper, there is no real threats about cannibalism because it’s just an extension of the product/service. This kind of innovation is often found in perfect competition sector where everyone is trying to differentiate himselfs. The flexibility here is the key, be able to directly react to an competitor’s change.

Second, “radical innovation**” provide something new to the world that we live in by uprooting industry conventions and by significantly changing customer expectations in a positive way. In opposition to the previous point, here the threat of cannibalism is real and need to be managed. To avoid this, company needs huge investments and to make a well-defined strategy to be able to react to the following waves of innovation. Here the distinction between monopole and small business is relevant. Indeed, small companies need to take some risk in order to penetrate the market, they have to be innovating to find the concurential advantage that bring them to the top. While monopoles need to invest in R&D to gain some flexibility in case of new start-up, or they can reinforce their concurential advantage in order to put “entrance barriers”.

To conclude, for me, competitors and monopoles making both innovations in function of the type of the innovation, and of the degree of flexibility reflects by the investments in R&D. But here we still are in an theoretical ways while empiric analyze take into account to many factors.

*http://thegentleartofsmartstealing.wordpress.com/types-of-innovation/
**http://thegentleartofsmartstealing.wordpress.com/types-of-innovation/

The first thing you can think about the relationship between competition and innovation is: Competition promotes innovation. Why? If you don’t innovate, you can’t answer the demand as well as other firms which innovate and so are more available to satisfy the demand (better product). This can explain why company innovate so much money in R&D. But in fact, the relationship is more complex.
Schumpeter and arrow tend to explain the link by saying, for the first one, that the concurrence decrease the total benefit which decrease the incentive to innovate. Although the second one promotes concurrence to increase the incentive to innovation because it’s the best way to survive.

Firstly, promoting monopolies is a good way to motivate innovation. Certe, there is the replacement effect which explain that monopoly has less incentive to innovate because it already makes profit before the innovation. But if we look at the Microsoft’s website; “We will do this* by leveraging our strengths. We have powered devices for many years through Windows PCs and Xbox. We have delivered high-value experiences through Office and other apps. And, we have enabled enterprise value through products like Windows Server and Exchange. The form of delivery shifts to a broader set of devices and services versus packaged software. The frontier of high-value scenarios we enable will march outward, but we have strengths and proven capabilities on which we will draw.” (http://news.microsoft.com/2013/07/11/one-microsoft-company-realigns-to-enable-innovation-at-greater-speed-efficiency/)
What I want to point out is that a monopoly has incentive to innovate to stay the only one on the market, even with the replacement effect. Here, Microsoft, which have the power for many years through Windows Pcs and Xbox, and high-value experiences through Office, still innovate to stay on the top.

Secondly, promoting concurrence is also a good way to motivate innovation. Indeed, in a competitive market, company should use innovation to survive by giving a more competitive product and so gaining more market shares.

In conclusion, there is a double relation between competition and innovation; Capacity and Incentive. More companies have capacity to innovate if there is less competition. But less competition implies less companies which have the incentive to innovate. So competition and innovation are strongly linked (Capacity versus Incentive) but these 2 links go in a different way. And so the intensity of the competition depends, negatively on the capacity of each firm to innovate but positively on the incentive of each firm to innovate.
this*: going forward their R&D strategy

It is obvious that large firms are more capable to undertake innovation than small firms. Here are two arguments claiming that the capacity to innovate is higher among the larger firms:

First, larger firms are better to face uncertainty. Indeed, thanks to accumulated experience, they are more prepared to face and deal with it.
Besides, larger firms get a substantial advantage on the smaller ones. Due to their higher rate of production, they benefits from economies of scales on their R&D’s making them marginal.

However, to be complete, I should add another factor, i.e. the incentive to innovate.
Indeed, competition gives more incentives to innovate than monopoly and the need to differentiate itself among the other firms is crucial.
Furthermore, as stated in the text, innovate while a firm is in a monopoly situation risks to cannibalize its own market.
To sum up, if a firm, in a particular competition situation, is wondering if it should innovate and invest in a new project, it should pay attention to two factors. Its capacity to innovate and its incentive to innovate.

On a very broad level, it seems very intuitive that competition promotes innovation since a firm needs to come up with new products which are better than what competitor is offering, which can only be done through continuous innovation. But on a more granular level, the relationship becomes a complex one and can’t be generalized for every firm.
We live in a world where technology is changing rapidly, the barriers to entry are reduced and no firm can enjoy the luxury of monopoly power forever. Knowing that customer preference can change very quickly, even the monopoly firms need to innovate in order to stay updated. This is specially true for products which have smaller business cycle. One example for this is phone and tablet market. Apple had near monopoly in portable music player market through their product Ipod. Even after this, they continued innovating, very well aware that they can’t enjoy monopoly always. This led to the development of Ipad which was instrumental in Apple retaining its supremacy. This example demonstrates that innovation will always have its benefits which should motivate even the monopoly firms to spend on R & D. Given the economics of scale and more risk taking abilities, it should be easier for them to come up with innovative products which can be targeted at a different customer group thus minimizing the risk of cannibalizing. Again as seen from the example of Apple, the new innovation of Ipad didn’t cannibalize Ipod. Instead it brought new users who migrated from PC to Ipad thus benefiting the company.
Hence, to sum up, it can be said that competition does promote innovation to a large extent but it can’t be the only reason for a firm to innovate.

The bond between innovation and competition seems very clear after some empirical research. Indeed, looking at the conclusions of Schmitz, Galdon-Sanchez and others increasing competition on some markets is always related with a increased production due to a change in the way they had been working, in other word, companies tends to innovate in order to face the competition.

But, despite these results, can we simply conclude that competition brings innovation and that monopolies don’t innovate ?

I don’t think so, monopolies don’t want to invest in some risky innovation, where the result will simply be “self-cannibalization.” But much more than that there is a lot of hidden variables. Investing in R&D means that you can have less money for other segments like marketing, finance… Innovation has also have to be accepted by the consumers, looking at the Microsoft example and the consumer reaction when Vista or more recently Windows 8 went out was not the one expected by Microsoft. Those products are clearly negative to the image of Microsoft.

In fact, I think that innovation is more effective in a competition context where production has to be higher and where new products are more warmly welcomed by the consumer. This is always the same thing, innovate or die. If we look at the cellphone industry, Nokia missed the smartphones wave and were bought buy Microsoft (which, in my opinion, took the bad decision to stop the production of regular and unbreakable cellphones in the coming years)

I would conclude that innovation and competition are strongly linked but that monopolies and innovation are not antinomian. In fact, consumers want innovation, want the more simply product or services, more than that big companies has to be protected and ready to react if a marginal and little company discover a revolutionary innovation in their domain. Indeed, if we look at Kodak, it was one of the biggest company in the world but they didn’t invest in digital and died…

Competition and innovation are two things that are interrelated. As the article says, it is difficult to establish the nature of the relationship between those two things and I think that this relationship depends on different products in different markets.

I agree to say that competition leads firms to innovate all the time in order to survive on the market. A firm can’t innovate once and remains on the market next periods because due to competition, other companies innovate and thus attract all customers. There is also the incentive for new, small and fresh firms to enter the markets if companies already present on that market don’t innovate anymore. I am aware that innovation is very costly and risky but in competition I think that firms don’t have the choice if they want to attract customers.

Monopolies have more facilities to sustain on the market if they don’t innovate so much although I think they have to.
First of all, a monopoly can invest more on R&D in order to innovate than firms in competition. It can thus create a new product or improve its product with a new version of it.
Second, if the monopoly remains for ten years on the market with its first innovation for example, I think that it is bad for its image. Indeed, customers could see it as an old company which is not dynamic and creative. In our constant change world, I think that such a monopoly would no more be attractive.
Finally, in order to stay as a monopoly, a firm has to set barriers to entry and invest in R&D and innovate are part of those barriers. Indeed new firms can have incentives to innovate and enter the market if the monopoly doesn’t do it. In that case, the market would be in competition.

To sum up, I think there is no clear relationship between competition and innovation. The relationship depends on the nature of the market. Firms in competition have to innovate as well as monopolies even if the pressure is not the same.

It is obvious that there is a relation between innovation and competition, but indeed that relation is not that simple as one could think. I think it is more complicated than that, because the fact of releasing into the market a new product doesn´t depends just in the idea of having it and producing it to sell it, first it’s clever to make a research about the market, the competition, trend, consumers, prices, etc. There are other aspects other than the competition, for example the season, maybe it won’t be so clever release a new brand of winter clothes in the spring.

I don’t think that big companies ever stop innovating; it is true that small companies have more necessity to create new stuff but it doesn´t mean that big companies don’t need to innovate themselves. If they do so they could lose clients because of the smaller brands, it doesn’t even matter if the competition’s products are better or not, keep in the trend is always important, talking just about the aspect of the product for example. In the other hand it is also possible that they can innovate something and don’t release it to the market right away, conversely they could wait until it is the right season or right after the competition produce something alike. It is a lie that big enterprises don’t need to innovate although the only competition are themselves, however it is true that smaller companies have more hurry to create something new. Also make a good marketing for a product is essential for the success of its sells, and that is another advantage that big companies have better than the smaller ones, that could indeed delay the innovation of products because monopolies will always stay ahead of others releasing just the necessary to keep people interested in their products but not releasing the entire innovation.

The market is always changing, and the products have to keep up with it, and one of the main reasons for this phenomenon is the internet, the globalization and the social networks. The thing is that the market itself plays a key place in this situation, people get bored easily of the products, and they themselves will demand to companies new products, if not they will look for something else, even if it isn´t better or more efficient just for the fact of having something newer and different than the others.

Innovation competition have a significant role in enhancing the core competitiveness of companies and achieving sustainable development of companies.

Each industry has its own the limited life cycle which is irreversible and could not overcome the recession and then from immature to mature until the demise.
Industry demise means that the product be eliminated, New products and new industries come naturally to meet the higher demand of consumer.Innovation is both a source of power industry development and a factor which contributed to the demise of their fundamental motivation. Innovation contributes to promoting the demise of each industry,at the same time, it constantly spawns the birth of new industries. The entire national economy in such a fluctuations development with the dynamic industry and the replacement of fittest old products.

The “creative destruction” process(Schumpeter) well explain innovation is the source of power in macroeconomic growth and innovation cycle fluctuations.

In the long run, Innovation and monopoly complement each other.There was a positive correlation between innovation and monopoly. Enhance the monopoly power is happened inside of the market.It’s a self-generating product industry long-term evolution,that industry monopoly endogenous.

In general, Big companies get some monopoly power though innovating and legitimating business.This monopoly was born in the market innovation and competition in the product.It is a fair competition and is not contradictory to the market and economic efficiency.Therefore, not all monopoly power or acts are illegal or all social undesirable results. The health monopoly in the market,the consumer surplus and the total social welfare complement each other. This monopoly does not do harm to consumer welfare and public interests.It will not affect the healthy development of the market economy.

In antitrust justice in Western countries, The main object of antitrust law are conspiracy, tying, mergers endures born monopoly market regulation.Innovation and competition in the market and sanctions object is never born monopoly antitrust laws.The EU and the United States Federal Trade Commission proceeded,respectively,in 2007, 2009 Intel and downstream business collusion vertical agreements. Although technological innovation will inevitably bring patent protection and high economic profits, but does not mean that technology innovation is illegal monopolistic behavior, but does not mean that the company was born in the market monopoly power upgrade is wrong.

In the research and development innovation competition,there are several issues worthy of thinking in the following:
1. innovation competition tends to involve related issues, The most typical is the social welfare issues, technology spillover issues, technical issues, such as imitation. What makes the biggest social welfare, technology spillover minimum, the minimum probability of technical imitation,While the largest corporate profits.Based on previous studies, it’s difficult to satisfy several conditions. Could we establish a mechanism to make this several conditions to achieve Pareto optimality ?
2.Most researches on innovation competitive are in the theoretical stage.There are few studies related applications.The results which theoretical research innovation competition if applied to business practices remain to be empirical.
3.innovation competition, how the government stimulate innovation? If the tax relief could effectively stimulate innovation, how much relief is the suitable(best)?
And what could we do when we treat patents Government to develop appropriate policies,Which triggered a series of questions are worth thinking about.

In this short reaction I would like to elaborate on the relationship between competition and innovation. I want to start by saying that I do not believe this is something that can be measured empirically, as was already stated in the introduction. I believe that both the degree of innovation and the degree of competition are not adequately measurable to prove a relationship between both. Both of the factors are influenced by so many other factors such as industry, collusion,…

The main goal of my reaction is to give some arguments to counter the theory Steve Jobs proposes: He does not see the advantage of innovating as much as possible because he believes they will only cannibalize their own business. I do not believe that companies should innovate as much as possible, but a proposition like this is a bit strong as well in my opinion. I want to prove my point by referring to another quote in the introduction. The introduction states that a large incumbent may be in a bad place to cope with the next generation of innovation. I believe that large incumbents have another reason to keep on focusing on innovation than just improving their product and thus cannibalizing their business. They will stay more agile by continuously innovating. If the next generation of innovation arrives, they will be much more ready to react swiftly to surf on the wave. I believe this is what may have caused a lot of problems for the large “extinct” dinosaurs of the past.

To conclude my argument I therefore think that the “incentive to innovate” aspect should not necessarily be smaller for large firms. Even though they have more to lose from cannibalism, they also have more to lose from disruptive innovations that they may not be able to follow if they do not train their flexibility. The outcome becomes even more complex and uncertain than as proposed in the introduction.

First of all, it seems important to make the distinction between large firms and monopolistic firms. Large firms are more likely to innovate due to the funds they can provide and the risk they can undertake which reduces the risk of innovating. In some cases, the very reputation they hold may increase the willingness to accept new processes and products. The disruption should then be lower and this should give them an additional incentive to innovate. Monopolistic firms, in turn, do not have many incentives to innovate due to their position, they will feel the urge to innovate only if threatened or when trying to expand their businesses. To those two incentives, we can add the willingness to implement possibly costly process innovation to reduce the marginal cost while keeping the same price, managing, in the best case scenario, to gain extra profits. The uncertainty of innovation does not play well with the “risk-free” environment of a monopoly. While the promise of monopolistic power gives a large incentive to the entrepreneur to surpass himself, the actual position of monopoly provides fewer incentives to innovate than competition.
In contrast, in a perfectly competitive sector where the profits are driven to zero, the question is not as much do the firms want to innovate but can they. In an environment where innovation can put you ahead of your competitors, the firms have incentives to innovate because it could bring additional market shares and additional profits. The problem lies within the resources they have at their disposal. When every penny counts, who would risk it on innovation which can bring more damages than good. But the assumption of perfect competition is an unrealistic one and firms do have some resources to invest in innovation. The tricky part is how much time the other firms need to react and adapt their way of doing business.
Finally, the disruption argument balances in favor of competition. Monopolies want to keep the status quo while firms in competition want everything but the status quo. Their need for strategic changes will push them to innovate when they can. This, of course, depends on the characteristics of the sector: potential entrants, number of firms in the market, external demand, etc. This last point raises another question, if firms are responsible for innovation, they are dependent on external demand and this demand could give incentives to innovate independently of the position of the firm. For example, if consumers in a monopoly begin to change their preferences, the monopolist will have to adapt their comportment if they want to survive.
In conclusion, competition seems to foster more incentives of innovation than monopolies and is thus preferable to monopoly.

Whether competition positively influences innovation or not is debatable, not because of a lack of scholarly investigation, but because of the number of extraneous and internal factors that influence the answer.
Aghion et al (2002), delving into this question for product markets, theorise that an inverted U relationship exists between competition and innovation. Moreover, they state that for first movers, there are increasing incremental profits achievable by investing in innovation, and conversely, competition reduces incentives for innovation among laggards. Evidence supporting this argument can be observed in real life. For instance, in the mobile phone manufacturing sector, the presence of players catering to the entire spectrum of consumer preferences pressurises the larger players to constantly innovate: hence the move to make the slimmest, lightest, most feature packed mobile phone. The laggards usually wait for an innovation to become widespread, so that adoption does not entail significant costs. This can be seen among players who usually differentiate themselves on price, providing slightly dated features at a fraction of the cost.
On the other side are sectors with little competition, where the established behemoths hardly innovate: GM, Ford, Chrysler only produced vehicles with different looks till the advent of Tesla forced their hand towards enhancing efforts in developing non-fossil  fuel powered vehicles.
To extend this point of view into the services side, say the luxury hotel industry, one sees that similar to product markets, high competition would force players to continually enhance the comfort (or any other experience attribute) that is provided to residents at the hotel, so that they are preferred.
Thus, it appears that in a competitive market, innovation is preferable, and less competitive sectors are likely to see less innovation by the large player(s).

Reference: Aghion, Philippe, Nick Bloom, Richard Blundell, Rachel Griffith and Peter Howitt. “Competition And Innovation: An Inverted-U Relationship,” Quarterly Journal of Economics, 2005, v120(2,May), 701-728

The bond between innovation and competition is a subject that theories and economists seems be contradicted. First of all I think that every companies have to innovate in order to be competitive on a market. If you don’t have the incentive to innovate, you don’t want evolve in your project and it could have an impact in your business (for instance, stakeholders could no longer trust in you).

I think if you want to innovate better than the other, you must have investment in R&D. The problem is that small companies which don’t have enough budget to invest are a little handicaped. Moreover, when you’re a start-up, you have to innovate and have more ideas than greater companies if you want to enter the market and not go directly bankrupt.

Indeed, the bigger companies have an advantage because they can allocate more budget without take a big risk of too much waste of money compared to their total budget.

On the other side, we have a good example with the firm of Steve Jobs (Apple) which invest more budget in Marketing than in pure innovation. Every 6 months a new Iphone is in stores with only tiny innovation/improvement compared to other cellphones with more new characteristics. In that case, we can say that innovation is not directly in link with competition but I think it’s an exception and it’s so difficult to imitate this business plan.

To conclude, I’ll say that innovation has a link with competition in most cases and I recommend to all kind of companies (Start-up, monopoly, small and big firms) to invest in R&D which will be the most of the time important to survive in the competitive world of the business.

I think that the relation between competition and innovation is varying according to the external environment and the incentives. At first glance, it may be obvious that competition involves innovation. A cut-throat competition obliges competitors to respond innovatively to cut their costs. However, the relation is more complex than this simplification.

Theoretically, competition should allow a better allocation of the resources by eliminating the less effective firms. However, some companies can manipulate the market with agreements. For example, Lundbeck, a pharmaceutical company, paid generic medicines companies to not enter their product’s market. This kind of agreement completely destroys an innovation opportunity. Lundbeck wins because they can still sell their medicine at the highest price, the generic medicines companies win because they earn money without any investment but the society as a whole loses.

Agreements between competitors can also have a beneficial effect for the society. Indeed, R&D agreements that state that the competitors have to bring the results from their research together in order to allow them to produce better and cheaper can be positive. Also, two competitors can cross their complementary technologies to enter new markets with an innovative product.

“Firms with more market power have smaller incentives to innovate”. It is true that for example Apple is leading people down the garden path by launching each year a “brand new” IPhone that embarks only one new compass comparing to its predecessor. The Lundbeck case also illustrates perfectly this quote. I think that usually competition leads to innovation, but when it’s not the case, when a company manipulates the market, some measures have to be taken to open the market and to give innovation a chance.

The nature of bond between competition and innovation seems to be an open ended question because of multiple strands leading to different conclusions.

Competition is driven by – no. of firms competing and the stance the competitive firms are taking to be the market leader (imitating the output of leader or out-performing the leader). Innovation is driven by – the capacity and the incentives linked to it.

No competition no innovation, it’s not that linear as it seems with more competition more innovation. If there is no competition present in the market presently, there is always a need for innovation to preempt the potential competition. How? Market leader here does not innovate to cannibalize his share but enters an unrelated business through innovation. For example, Microsoft from Windows to Gaming consoles. Also, if there is fierce competition in the market, there is surely a need for more of innovation.
As innovation is needed in both the extremes of competition, the relationship can-not be that simple to establish.

Innovation could be to match the leader or outperform him or Innovation could be for breath-taking technology to out-perform. But that innovation depends on the capacity and incentives from it. If a firm does not have capacity to spend, the competition would not drive innovation in this case. If firm has the capacity but does not have much incentives to innovate, again the competition would not matter. And as incentives could be in form of positioning or profit, the capacity and incentives both drive innovation and not just competition. Also, the duration of having those incentives will matter.
Here we again established that the competition is not driving the innovation but the internal factors of the firm.

There are several market variables (like an inherent demand of the product which no other firm has realized yet) apart from the internal factors of the firms that drive the innovation. Sometimes, it’s not just about competition – it’s about expanding your horizon by diversifying in both related and unrelated markets. Hence, I would conclude that it’s difficult to establish the direct generalized bond because it will vary with the market conditions.

I find that small and big companies need to innovate, to give importance at the R&D department.

Small companies must innovate to be competitive with the others. If you don’t have a product with different characteristics nobody will buy it. It’s easier for a start-up to enter in a market with a new/innovative product and try to grab some market share than with an existing product. A problem for small companies is maybe the available budget to innovate. To have a good R&D department costs a lot of money and needs also a team of engineers. This is really an advantage for big companies because they have more resources. In addition, they can afford to lose money without putting the company in difficulty. But these large companies should pay attention to always develop quality products representing the brand. If Apple sell a deficient I-Phone in the future, they could lose they symbol of quality.

Biggest companies must also innovate. They must be competitive and affirm their leadership position. If a company never ameliorate his products it will maybe lose some market share in the future. For instance Apple develop a new version of the I-phone regularly, I think that it’s induce more competition with the competing firms and always sell the best products at the customers.

About monopolists they should innovate, just to keep these monopole situation. If a company never question his products, that is an opportunity for others societies to try to enter a market.

In my opinion there is a link between innovation and competition. Innovation is one of the implements to be competitive for all the societies (monopoly or not) and so the R&D departments should not be significant.

In my opinion, I agree that there is a certain link between innovation and competition, but it is too difficult to establish a complete theory over it. There are also different types of markets where we have to innovate rapidly and hard like the IT’s market, and by opposite the automotive market, where each new innovation is not seriously different from the last one and are separated by 2 or 4 years (for each model).

This article talks also about the problem of cannibalization of products of one firm; let’s look at the war between Apple and Samsung on the smartphone market. I don’t really see cannibalization, they each one release a new version of their best smartphone Galaxy S or iPhone, once a year… Releasing the iPhone 5 should make the iPhone 4 cheaper? Yes, and Apple knows it, try to buy a new iPhone 4, the only version you will find will be the 8Gb version, which can be considered like a “damaged version” because his memory is too small for an optimal use. So, everyone who wants a good iPhone will not have really the choice, he will buy the 5th. It’s a kind of menu pricing.

But now Apple and Samsung have to innovate both, at the same speed because they don’t want to lose their market shares like Blackberry which is too complicated in use or Nokia which innovations were to slow compare to these 2 giants of IT.

These examples show that on a competitive market innovation is very important, firms have incentives to innovate if they want one day hold the position of monopolist. Maybe after they will get this position, they will slower down the innovation rhythm because their priority will be making profits and not more “don’t lose market power” and the social welfare will be reduced… It’s why there exists competition policies to avoid such situation

The relationship between innovation and competition is really complex. Indeed a lot of factors influence it and depending on the sector, the position on the market, the size of the company, etc. it’s not comparable.
What’s sure, there is no linear relationship. During the life of any company, this relationship evolves according to its size, its market share (regardless of the level of competition).

Let’s take an example, Apple. During several years, they were considered as very innovating company. Our market was quite without real competitor since they have positioned themselves as better as other computer. They developed a lot of innovate products; iPod first, then iPhone, iPad, and many versions of each ones. A long time, they were almost the only one on this market like a monopolist. Now, for a few years, some other companies begin to compete with them: Samsung (the biggest one), HP, BlackBerry, Sony, Archos, Amazon, etc. Even if Apple is still the leader, far ahead, its market share is becoming to stagnate. When Keynote Speech are announced, people ask them if Apple will be able to propose some innovation and they are more and more disappointed (for some of them). Why? Because Apple has innovated a lot during several years, but now they “just” make some evolution of existing products.

Here we can see a reverse relationship. We would more likely to say: the more we have competitors, the more we have to innovate, not especially a linear or determined link, but “a link”. Here, Apple innovated when it was (practically) alone, and now it has competitors and it can’t innovate so much.
I think competitors here don’t influence the “innovation curve” of Apple, it’s more likely the knowledge and the technological discoveries which drive the Apple’s innovations. The company has reached a point where innovations are more complicated to generate, it’s for me the main reason for it decrease.

In an economic point of view, Apple has to manage a double problem. It sees its competitors more and more expand themselves and so its market share is decreasing. On the other hand it can’t attract more people by developing, as it has always done, new innovating and useful products.

This example shows that competition doesn’t always allow to companies to develop innovation. A lot of factors should be taken into account. The strength of the competitors are one of its but this relationship is influenced by many other factors.

As much as Steve Jobs is a person I hold in high regard I feel his evaluation is incomplete.

“what’s the point of focusing on making the product even better when the only company you can take business from is yourself?”

There are two reasons for this:

First developing a product even further, especially in an area such as technologies may have bigger repercussion than the product in itself or the original market. Developing could result in gaining even more advancement in the field and making it harder for potential competitors to enter the market. One just needs to read Tushman “Managing evolutionary and revolutionary change”to be convinced that a company that doesn’t evolve is a dead company. It may be at its highest now but there might come a time when an other actor enters the market with a similar product but with newer technology ant the turnover will be hard for the old company (if it wasn’t prepared).
I personally think that if Apple wasn’t trying to push it products forward (iphone, imac) it would never have come with the idea of the ipad. So there’s economies of scope to be done between innovations. Or even better it may lead to the discovery of a new market.
This analysis must be tempered with the fact that I was mainly considering a technological market. In fields where change is hard to implement (contraction for example) the payback time for an innovation might be huge and this could lower the incentive to innovate.

Secondly I remember Steve Job as a product driven person. He always had the will to lead his project (product) to what he considered perfection. This enabled Apple to produce wildly appreciated products put also to position itself as a quality company. The are currently trying to emphasis their positioning on the luxury market. So managing innovation isn’t only about the product but also segmenting the market and positioning the firm. This could lead to a whole set of strategic opportunities closed to the firm which doesn’t innovate.

On the other hand innovating for the sake of innovation in a loss of money and energy. This can be seen with firms such as phillips which at some point had patents in a lot of different fields but with no global strategy to actually put them to some use. Or even worse a perfectly sane company could destroy itself by choosing to focus on a type of innovation and discovering too late that it was a bad choice (R.C.A.).

To conclude I’m a fervent defender of innovation in a firm as long as it’s strategically interesting to do so. It may lead to new products or to increasing sales. Especially because mature firms have the cash and the possibility to absorb failure, thus minimizing the risks. The innovation deosn’t have to come from the company in itself but could be brought to it through mergers and acquisitions.

Establishing a relationship between competition and innovation is not obvious. Markets are complex to understand due to the great number of agents that all differ from each other and act and interact according to their characteristics (production capacity, demand, preferences, etc.). In those cases, it might be beneficial to try and look for an environment that is similar to the markets we want to understand but much easier to understand. One such environment, where competition and innovation are omnipresent and the implications very easy to grasp, could be motorsports.

In motorsports, there is no patent system that would allow a team to possess exclusivity on an innovation. The result of this lack of patent system is obvious. If a team wants to remain at the top, it has no other choice than to “out-innovate” other teams. Competitors can blatantly copy each other’s ideas (as long as no illegal activity was involved). Hence, secrecy is the only weapon at their disposal to keep competitors from replicating innovations.

The outcome of this type of competition is apparent. Cars keep getting faster and faster, even though new regulations are implemented to slow them down (some innovations were even banned after only one race). But the level of competition is important for the rate of innovations. In F1 (where Renault, Mercedes, Toyota, Honda, Ferrari, Jaguar and BMW competed against each other a few years back) innovations become obsolete at a much faster rate than, for example, in the WEC series (for a long period of time, Audi was the only major manufacturer there). An F1 car evolves from race to race. In the WEC, a manufacturer can rely on an innovation for a whole year. Naturally, the costs in F1 are exorbitant.

In some instances, the intense competition between teams escalated to point where it became destructive. In the 1980’s, after numerous incidents the Group B and Group C racing cars were deemed too fast and too dangerous to race. In 2001, a race (the Firestone Firehawk 600) in the US had to be cancelled because drivers were not able to physically cope with the speeds in the corners. Many racing series disappeared due to the immense sums of money that a team would need to spend to be competitive (e.g. the DTM series). What usually followed was more drastic regulation, to control both costs and speeds.
In amateur series, teams and drivers participate mainly for fun. The winning teams will not get the type of reward that would justify a lot of investments. Participants know that they will most likely never break-even but the important part is to enjoy racing. Thus, old, rusty, obsolete cars are very common in amateur series.

So, even in the simple example of motorsport, we see many familiar concepts that we see in the real markets. The main aspect was that competition drives innovation, but that too much or too little competition kills innovation.

The nature of the bond between competition and innovation remains an open question as we saw in the article. However, there are some parts of it that I don’t agree with and I am going to discuss them here. I took the precise example of Apple and Kodak, two companies which had market power and had to face competition.

I would like to discuss three parts of this article more toroughly :

Firstly, Ray Lane says that companies face “The Innovator’s Dilemma”. If they improve their product and lead the way towards simplicity they will cannibalize themselves.

Secondly, “The Innovator’s Dilemma” refers to companies that succeed in one generation of innovation but whose success becomes then an obstacle for coping with the next wave of innovation.”

Finally, the conclusion that “This observation lends credence to the idea that firms with more market power (monopolies in particular) have smaller incentives to innovate than firms facing a higher degree of competition”

In my opinion this is not always the case and I will try to justify my position:

I don’t agree with Ray Lane. On one hand, Apple is a good example of a successful company who continuously tries to make the use of new technologies easier and available for everyone. On the other hand, if you use a computer you will face another dilemma, which is: being a “PC or Mac” user… I will not discuss it here. But the fact is that people are bored with all the Microsoft complications and problems. (I can’t remember all the hours spent to fix problems instead of doing my work), and that’s why we see more and more Mac computers on desks, I think. Simplicity is one of their key to the success. Time is money, it has always been money … and I would say : “the simpler, the faster”. That’s why I think it is not true to say that making things simpler can be dangerous for a company. People love simplifications and are ready to pay for them.

Moreover, I think that “companies that succeed in one generation but whose success becomes then an obstacle” are shortsighted companies. Kodak is one of them. As said in the article below, when new technologies are developed some companies are totally lost but others are able to manage. Kodak saw the movement but was not able to react properly. They didn’t see what could have made them one of the leaders of the numerical revolution. Compared to Kodak, Apple launched new products, saw the movement, and has surely become the leader by now. Apple faces no “Dilemma” because the company was able to innovate generation after generation and that its products are not obstacles for each other thanks to the future’s view of the managers.

(http://www.paristechreview.com/2012/02/20/kodak-lecons-faillite/)

As a conclusion, I will simply say that Apple faces a high degree of competition (with Samsung for example) and so they have a lot of incentives to innovate. That shows that this conclusion is not adaptable in every context and that the link between competition and innovation must be evaluated by comparing similar situations or companies by fixing the hypothesis and limits of the results found.

Alves (2007) presents a literature review in which a myriad of relevant aspects related with this debate are portrayed.
Several are the incentives existent on highly concentrated markets – and absent on those of low competition – for the establishment of innovative efforts from the firms.
First, it is undeniable that the process of technological change is generally costly and risky. Therefore, it is arguable that companies will decide to invest in new forms of knowledge conditionally to sufficiently high returns.
Second, monopolist firms are expected to become huge and prosperous organizations at some point, as they are likely to collect a substantial flow of revenues though time. Hence, theoretically, monopolist companies would be able to offer more attractive wages for the highest qualified human capital in the markets, a vital element of the creative process.
Third, highly concentrated markets are endowed of reduced asymmetries of information and uncertainty, in the sense that the absence of several competitors might enable the firm(s) set in the market to form sounder understanding about the market, thus, allowing them to perform a more efficient process of decision making.
Forth, it is highly limited the possibility that competitors have to free ride on a new invention, fact that is commonly verified in markets characterized by intense competition.
Finally, the elements mentioned in the post (economies of scale and better access to capital markets) are also relevant aspects that one can borrow to argue in favor of high concentration.
On the other hand, as argued by Steve Jobs in the post, monopolistic structures might not be encouraging enough to make firms investing in further risky innovative activities, given that monopolists are already able to enjoy a comfortable position in the market, in the sense that theirs profitability might not challenged by actions taken by competitors.
Based on the same reasoning, it would be desirable from the society point of view to have as much firms as possible. There is little doubt that the existence of several firms executing intensively innovative activities would amplify the technological dynamism of the economy. However, highly competitive markets might undermine the profitability of firms that conceive new innovations, given that the presence of numerous competitors increases the possibility of any of them to free ride on the new discovery.
The work of Aghion et al (2002) does not corroborate any of the view mentioned in the post. In this paper, the authors estimated empirically the relationship between firms’ willingness to innovate and market competitions for several sectors of UK’s economy. The conclusion of the study is that neither high nor low, but markets with intermediate levels of competitions would promote the highest incentives to firms perform innovation.
Summing up, the economic literature does not provide a consensual view about the topic. Arguing strictly in favor of any position will ignore relevant arguments in the opposite position.

REFERENCES

Aghion, P. et al (2002). Competition and innovation: An U-inverted Relationship. Nber Working Paper Series. Cambridge, MA: National Bureau of Economics Research, n. 9269.

Alves, R. M. O. (2007). Estrutura de mercado e esforço tecnológico. Tese de mestrado

The cost of production’s functions show us that a market facing perfect competition is more prompted to the appearence of innovations, since all the firms have less to lose than a monopolist would. This idea is supported by Arrow’s argument: “A firm in a competitive market would have high output levels, and so the cost of an innovation could be spread thinly, but a monopolist, with lower output, would be less inclined to incur that additional cost.”
The same idea, that monopolies have less incentives do innovate, is argued by Schumpeter, that claims that “a monopolist does not have competitors ready to imitate his innovation.”
Although I agree that Arrow’s argument makes perfect sense mathematically, it seems to me a too simplistic way of looking at this matter. Regarding Schumpeter’s view, I think it’s too focused in the short-run, because a monopolist may not have big competitors at one moment, but in some kinds of market if some smaller firms appear and start undertaking more innovation actions, if they do well in the market and start increasing the number of costumers there will be a time at which the monopolist’s position could be at risk. On this matter I totally agree with the idea that is proposed by the Gilbert-Newbery model, “monopolists often have a strong incentive to innovate, if only to preempt their rivals”, meaning that monopolists often think about innovation not as way to expand the brand or accomplishing a bigger market share, but as a self-defense measure.
As this is a very complex subject, there are many other factors to consider besides the competition level, especially the type of market in which the company is inserted. Considering my argument that a small company can be seen as a future threat to a monopolist, if we think about the smartphones or other electronical device industry this can actually be true, and it’s possible that monopolists think of innovation as a way to protect themselves. But for example if we consider a country where there is only one railway company that owns a monopoly, taking into account that it’s a product that is highly unlikely to suffer big innovations and changes, and that a possible entry for a new firm would be extremely costly, on that case I don’t think the monopolist would consider big investments in R&D as a way to assure protection against possible future competitors.
Therefore, considering all the facts and the opinions, I believe that there is a strong correlation between the amount of investment in R&D and the type of market a company faces, but we cannot directly make assumptions just based on that aspect.

The companies look after innovation because it allows them to extend the quality of their products or services and to develop more key skills. Thus the innovation allows them to improve their competitiveness either by a better cost control or because thanks to the innovation, the companies have a monopoly (permanent or temporary) on the market. The innovation is a big part of the business strategy.

When the innovation relates to the production processes, it gives the company an advantage in terms of cost. In that case, the company can apply lower prices. But when the innovation is about the product itself, the company can differentiate itself from its competitors. With this strategy, innovative SMEs could adopt and thus coexist alongside large groups. However, we must not forget that all innovation projects are not necessarily achievable by the organization (do not meet the needs or expectations of consumers, small budget …).

I would like to emphasize that I am not agree with this idea of the text : « that firms with more market power (monopolies in particular) have smaller incentives to innovate than firms facing a higher degree of competition ». Indeed, the monopoly is only temporary; whatever the originality, innovation introduced only provides a temporary competitive advantage. The innovation must be permanent within the firm to try to have a permanent monopoly.

Then there is also another idea of text that concerns me: « large firms may have lower incentives to innovate than smaller firms, basically because they have more to lose ». In my opinion, this affirmation can be true but also false.

On one hand, a small firm has the advantage of being more flexible, it is a privileged creativity place because of their organization. It encourages risk-taking associated with innovative projects and allows a quick decision making. To be innovative the company must have a relatively flexible organization, give some freedom to work and initiative employees. For large firms it is more harder to be supple.

On the other hand, a large company has probably more financial resources to overcome the failure of an innovation, while this is generally not the case for SME. SME must be very vigilant when they opt for a strategy of leadership. Innovation absorbs a lot of resources that are heavy. Funding sources are limited. Internally, financing is achieved through research and development budget and cash flow of the business and externally with the help of venture capital.

To conclude, innovation certainly plays a positive role in the competition. But nothing is ever acquired, innovation must be constantly reassessed, updated. Innovation takes time, money and an adaptation of the company strategy. So it can sometimes have a negative impact on the business and the competitiveness if the public does not react positively to it.

First of all, I think that the degree of innovation in companies depends mainly on the sector. Indeed, companies which are in a sector of new technologies have to innovate more than others. Specially if they want to offer best products to their customers.

Concerning the link between competition and innovation, I agree that it’s really complicated.
I choose to take the example of Whirlpool Corporation, a manufacturer of home appliances. As everybody knows, there are a lot of home appliances brands on the market (BOSH, SIEMENS, KENWOOD, ELECTROLUX,…).
The penultimate CEO of Whirlpool, Dave Whitwam, was really mindful of the importance of innovation in this sector.
He was aware that each brand could offer a refrigerators which keep the food cold. But Whitwam wanted more. According to him, Whirlpool had to offer innovative products and services that solve problems and are valued by their customers. Moreover they had to find innovative solutions that were not available to their competitors. Therefore, he wanted Whirlpool to generate a competitive advantage.
Personally, I think that Whitwam were right. Innovation is the best way to possess a competitive advantage and so to earn the loyalty of customers to the brand.

For monopolies, innovation is really important too, and specially in the sector of new technologies. Indeed, the consumer needs are always changing. And so, without innovation, others companies could easily find new products more specific to their needs. Moreover, without innovation, they can’t create new products or services. In this way, I think that people will be weary of using always the same products. (For example, Microsoft frequently update a new model of his Windows operating system)
Innovation is a good way to discourage competitors too. Indeed, if they see that your products are at the forefront of technology, they might be afraid of not to be able to do better than you. This can be considered as a barrier to entry.

To summarize, I’ll say that in the two cases, innovation plays a big role. On the one hand, it can help companies to beat competitors with the possession of a competitive advantage.
On the other hand, less competition has to force companies in situation of monopole to innovate. It’s a good way to keep their customers and to discourage competitors.
And so, if there is a link between innovation and competition, I think that it’s very difficult to determine it.

According to the article by Douglas Clement cited on this post, there are significant empirical evidences supporting the view that competition is more favourable to innovation.

Theorists have constructed several possible mechanisms that may lead to this conclusion, namely the “switchover disruption”, but I still find the idea quite paradoxical with the firm’s profit maximizing hypothesis. There are several historical examples of technological monopolies that lose their advantage, due, among other possibilities, to new technological substitutes. As a result, in a long-term profit maximizing approach, besides their better capacity to innovate, monopolists should also have the incentive to do so, in order to secure their position, and thus to maintain maximizing their profits.

I believe two relevant ingredients that are missing in the analysis are moral hazard and the time dimension.

Firstly, while a firm is supposed to “live for ever”, their managers won’t. As the managers’ time dimension is shorter, their own interests won’t be fully aligned with the long-run interests of the firm. That is to say, they will be more concern with maximizing shorter-term profits. As a result, in the case of a monopoly, managers may not be willing to renounce to higher current profits by involving in costly innovation, instead they will extract all they can from this advantaged period.

Secondly, and worsening the previous example, shareholders might also not be fully aligned with the firm’s interest. Despite the known relevance of bequests they leave to their offspring, shareholders might also suffer from some myopia. That is, they may also be more willing to extract all the possible profits from a monopoly, instead of pressuring managers to be aligned with the firm’s long-term interests.

I thing that these two mechanisms, that are widely explored in several fields of economics, may also play an important role on explaining this phenomenon.

I think intense competition as well as few competition (monopolies) can induce innovation. As it is said in the article, there are two elements that make innovation possible : capacities and incentives to innovate. Competitive and monopolistic conditions both present one characteristic more than the other.

On the one hand, more competition may induce more innovation because it is a way for firms to survive. Firms in a competitive market thus have the incentives to innovate, but they may not have the capacities. Indeed, as the price is close to the marginal cost, those firms may have too low revenues to have money to invest in R&D. However, this problem could be solved through policies sustaining innovation, such as subsidies.

On the other hand, less competition (monopolies) could also lead to more innovation because monopolists have the capacities to innovate. Indeed, as they enjoy large mark-ups, they have the financial capacities to face the risks inherent to an innovation process, and they also have the material resources to implement the innovation because they have large production facilities. However, they may not have the incentives to innovate because higher profits mean higher opportunity costs and thus more to lose if the innovation fails.

This latter argument needs to be nuanced. In the case of entry deterrence for instance, a monopolist may be encouraged to innovate because of the fear that a potential rival could preempt him by adopting an innovation and then enter the market (assuming that entry is possible at a low cost). A monopolist could therefore innovate in order to maintain its monopoly power (using patents or other protection systems so that potential competitors can’t copy him).

We can also nuance the capacity aspect of innovation. Indeed, although a monopolist has more capacities to innovate than a firm in a competitive environment, the latter produces more than the former and can therefore spread the (fixed) cost of the innovation on a greater output.

To conclude, I think that from a theoretical point of view, innovation can be positively correlated with competition as well as with monopoly, but these theoretical statements need to be confronted with the reality.

In his widely read book entitled ‘Capitalism, Socialism and Democracy’ Joseph Schumpeter argued that large firms were more capable to undertake innovation than small firms. Douglas Clement explains in his article ‘Creative Disruption’ on which ground such a claim is made. He lists the three main arguments Schumpeter used to defend his point of view:
1) Larger firms are better to face uncertainty.
2) Larger firms have less competitors to share their innovation with.
3) Larger firms face economies of scale in terms of R&D.

However, the reasoning of Schumpeter is not perfect in so far as it is far from being exhaustive. First, Schumpeter did not recognize the fact that competition gives more incentives to innovate than monopoly, as it was argued later by Arrow and his famous replacement effect. Second, Schumpeter sees innovation as a linear process with only one way to innovate. Such a vision does not correspond to reality. In particular, some inefficient innovations may lock-in themselves because of network effects if no parallel research is being conducted. Competition somehow prevents research avenues from being dropped too early.

I think that, as it is explained in this article, the link between competition and innovation is quite complex and can vary according to the sector, the industry, the company and so on.

One part defends that competitive markets boost firm to innovate. In fact, in a competitive market, firms must innovate if they want to keep their competitive advantage. In a “dog-eat-dog” market, firm have to invest a lot of money in R&D in order to stay at the forefront of technology. However, in the article “Sparkling Fountains or Stagnant Ponds : An integrative model of creativity and innovation implementation in work groups” written by Michal A. West, it is shown the external demand is influenced by 4 factors : uncertainty, time constraints, competition and severity or challenge. So, in a competitive market, the external demands are high. This article explains that creativity ,which occurs in the earlier stages of the innovation process, requires an undemanding environment (so with small external demand) whereas innovation implementation process, which occurs in the latter stages, requires the opposite. So, due to the high external demands of a competitive market, the capacity of the firm to generate creativity will be reduce. In fact, workers feel to much pressure on them and feel incapable to forget or avoid it. In this way, we can defend the fact that my first sentence : “One part defends that competitive markets boost firm to innovate.” is not always true.

I also want to make a comment on the fact that “large firms are generally better equipped than smaller ones to undertake R&D”. Of course, this is true but I want to add the dark side of the big company. When a company grows, they develop a lot of structures and systems which increase the complexity of the organization. All theses structures and systems are linked and so, innovations are more difficult to implement, in their production and their processes. This is called the structural inertia. There is a another inertia called the cultural inertia. When a organization becomes older and bigger, people imagine that they know how things are to be done. This is seen in the informal norms, myths, stories , … of the company. When a company must innovate, the culture can become a significant barrier because the culture is “ephemeral and difficult to attack directly”. Due to the cultural and structural inertia, big companies can have more difficulties to innovate than small companies. (source : Ambidextrous Organizations : Managing Evolutionary and Revolutionary Change, written by Tushman and O’Reilly)

As said in the article, the relationship between innovation and competition is not only positive.
Competition is one of the factors that determine the level of innovation.
We read an article in the class of Innovation management ( West, Sparkling fountains or stagnant ponds: an intergrative model for creativity and innovation implementation in work groups.) where the author try to build a dynamic model to measure the level of innovation.

He classifies the Competition as external demands like the uncertainty, the time constraints and the severity of the challenge. Furthermore this category of factor has an inverted-U relationship with innovation, which means that at extreme levels it have a negative impact on the level of innovation.
On another side he describes the innovation process in two stages: creativity and innovation implementation. And he maintains that competition might only be beneficial when we are in the second stage: the innovation implementation.

So when we apply this model on a big company like Microsoft which is close to be a monopoly we find that a low level of competition is good for creativity but will fail in the second stage: the innovation implementation.
However with the success of Apple, Microsoft monopoly tends to disappear and so the level of innovation will increase and reach an optimum (the top of the inverted-U) where new technologies will succeed.
So despite the fact that Microsoft don’t want to kill its cash cow, at some time he will have no more choice than to innovate and invest in a new encouraging product.

Find the link between competition and incentive to innovate is very complex. The theories disagree on this subject. Do monopolies have more or less incentive to innovate than competitive firms?

First I will give few positions on this question and then I will talk about the theory of Creative Disruption that integrates both extremes.

Schumpeter though that the link between competition and incentive to innovate was an inverse link. He said that monopolies don’t fear for imitation and that they are more able to manage the risk induced by research and development.

Arrow believes in the contrary. As monopoly sells at a higher price a lower quantity than competitive firms, then a monopoly can spread the fixed cost of innovation over a lower quantity of output. Then the link between completion and incentive to innovate is positive for Arrow.

The idea of Creative Disruption is that the link between competition and incentive to innovate depends of the nature of the innovation. If the innovation is disruptive then it is more costly for a monopolist so he has less incentive to innovate. If in the contrary the innovation isn’t disruptive, then a monopoly has more incentive to innovate.

Clement, D. (2008). Creative disruption. The Region (September): 30-33, 58-61.

Firstly, Innovation enhance the capacity of competition. For example, in electronic market in Japan, there are fierce competition, many companies are facing a risk of collapse in recent years. According to statistics in 2011, Panasonic loss of 10.2 billion dollar, Sony loss of 3 billion dollar, Sharp loss of 3.8 billion dollar. A major factor to this result is that these three companies always keep traditional business. Maybe it like Mr Lane said that the innovator’s dilemma, these three companies succeed in one generation of innovation but whose success becomes then an obstacle for coping with the next wave of innovation. So innovation enhance the capacity of innovation, if you don’t want to innovation, you maybe will face a dangerous situation.

Secondly, the market competition has forced companies to conduct market innovation. In my opinion, if the competition is very fierce, every companies will consider to innovation, larger firms have better capacity of innovation than smaller one( in terms of economics of scale, capital market), but they maybe loss a lot than smaller one because they should allocate huge money in R&D. Thus, even though they are facing a fierce competition, they maybe lower incentives to innovation.

In conclusion, the link between competition and innovation is a complex task indeed, we can not arbitrarily say that the more competition the more innovation, we should analyze specific problems in specific ways according to different market, different firms, different situation.

In order to analyze the link between competition and innovation, it is important to understand how competition is measured. Drawing my analysis from Goettler and Gordon’s paper (Goettler, Ronald L. and Gordon, Brett R., Competition and Product Innovation in Dynamic Oligopoly, April 17, 2013), I would like to analyze the effect of 2 different measures of competition on innovation – product substitutability and knowledge spillovers.
As the article suggests, there is a lot of literature available supporting opposing views regarding the effect of competition on innovation hinting at the fact that the relationship is not intuitive and straightforward. Choosing product substitutability and knowledge spillover as measures of competition brings out the complexity in greater detail.
In the paper, the authors suggest an inverted-U relationship between innovation and product substitutability. When the product is not that easily substitutable with competitor’s products, i.e. the product substitutability is low, the laggards in the market don’t have much incentive to work on the product quality as that would hardly affect their sales. As the product substitutability increases, investing in innovation would make the customers prefer your product over the competitors’. Hence the positive slope of innovation versus competition. However, as the product becomes more and more substitutable, the bigger companies would have the incentive and resources to invest further in innovation while the smaller firms will lag behind. This will reduce the probability of catching up with the leader and the overall investment in innovation would decline. This explains the inverted-U shape of the innovation – product substitutability relationship.
The effect of knowledge spillovers on innovation depends a lot on the reaction of the market leaders to the efforts made by the laggards to innovate based on the ‘prior art’ (standing on shoulders effect). The leaders might not want to share the benefits with others in the industry. In this case, knowledge spillovers might bring down the investment in innovation. However, if the amount of knowledge spillover is high, then the laggard firms may be able to close the gap with the leader faster which would induce the leader to pump in investment into innovation to defend its lead (eg. Smart phones market).

Thinking about the relationship between competition and innovation I would at first argue that competition enhances innovation because, when there are many firms competing on the market, they try to be innovative and creative in order to gain a higher share of consumers and they more likely invest in R&D in order to find a less expensive way of production. A monopolist, on the other hand, doesn’t need to innovate a lot because it already has a huge market power. On the other side, a monopolist can benefit from economies of scale and therefore it can be more prone to invest in innovation. In addition a monopolist can create barriers to entry through R&D because R&D can be a fixed cost that new entrants have to face when they want to enter the market; whereas with perfect competition we don’t face this problem.
As stated in the post understanding the real relationship between competition and innovation isn’t easy at all and also the opinions and empirical findings of different authors are divergent.
I would like to focus on the work of Aghion et al. (2002) because I find that it studies the link between competition and innovation under a good perspective and in a complete way. According to them the bond between product market competition and innovation can be described by an inverted-U relationship. They distinguish between laggard and neck-to-neck sectors and find that competition encourages neck-and-neck firms to innovate whereas it discourages laggard firms. Innovation incentives depend upon the difference between post-innovation and pre-innovation rents. In neck-and-neck sectors more competition can reduce a firm’s pre-innovation rents by more than it reduces post-innovation rents and therefore it encourages R&D investments; in this sector we have the so called “escape-competition effect”. In sectors where innovations are made by laggard firms with already low initial profits, product market competition will mainly affect post-innovation rents resulting in a “Schumpeterian effect”. They also argue that if the initial degree of competition is very low, an increase in competition should result in a faster average innovation rate. On the other hand, when the initial level of competition is very high, an increase in competition should result in a slower average innovation rate.
I find this approach useful for the analysis of the topic because it considers different aspects of firms and then studies what is the impact of competition on innovation depending on the characteristics of the firms. I think therefore it is a good model to take into account when analysing the subject.

Reference:
http://www.nber.org/papers/w9269.pdf?new_window=1

Before reading this text, I guessed that innovation was a form of competition, a way to have a competitive advantage on the competitors.

But after reading this text, I have understood that it’s more complex than my simple explanation even if my idea is not totaly wrong.
Of course there is a link between both, like writing in the text: “… firms with more market power (monopolies in particular) have smaller incentives to innovate than firms facing a higher degree of competition.” It’s clear that there is no sense to improve a product if the only firm you have to compete is yourself. If I stopped my reasoning here we are still in the idea that innovation is a kind of competition and so we can write the link between both like a linear function.
But it was without taking into account that not all firms are able to innovate (indeed you need lots of money in R&D for example). Taking it into account, it’s understandable that there is a distinction between incentive and capacity and I do agree with what is written in the text: you cannot summarize the link between innovation and competition by saying more competition implies more innovation!

In conclusion, I think that to explain the link you need to divide “the market”. When firms have the capacity, the sentence above is right. But when it’s not the case the firms will use another way to find a competitive advantage or find money to innovatote and I think it’s not possible to explain the link by a linear function like (Y=α+βx) with Y equal the innovation and X equal the competition.

I think that there are several drivers to the link between competition and innovation. Some are in favour of a decrease in competition to foster innovation while others defend the opposite view.

First of all, it seems at first glance that the presence of other competitors obliges the companies to find ways to escape from perfect competition by gaining a competitive advantage towards others. How to do that? Through innovation in either the product itself (new feature or combination of them, new possible use, etc.) or in the process. While the first solution appeals for product differentiation, the second one could be associated to a strategy of cost leadership. In this last strategy, innovation would help to make economies of scale for example.

Secondly, I don’t agree with the argument stating that the lack of competition is an incentive in order not to innovate. This could be true if the word “competition” was understood in a narrow way, i.e. the companies on the same market as us. But if we want to have a more realistic approach we must also include all the potential entries on the market. Now we can see that even in a monopoly position you have all interest to continuously innovate in order to stay at the cutting edge of technology and thus avoid the risk to be surpassed by other competitor that are not on the market yet.

Then I would like to stress the fact that IP protection tools aim at reducing competition in order to give incentives for innovation. So it seems that the promise of a monopoly through patents is an incentive for innovation. Perhaps this could appear to be in opposition with the first paragraph but here we deal with a future promise whereas the first paragraph was about how to escape from an actual situation.

Finally, I have a comment to make about the vision proposed in the article saying that large firms are more likely to innovate because they have more resources. I think that this vision is no longer true in many sectors. Innovation can be inexpensive thanks to the development of computer technology. The legends of the Silicon Valley are the living proof of this.

In the following I focus on the specific case of “true” monopolies (by which I mean monopolies that are operating on markets with substantial barriers to entry such as natural monopolies [where entry involves considerable sunk costs], i.e. on markets that are not contestable). My personal opinion is that “true” monopolies are clearly less conducive to innovation than any other (hence more competitive) market structure.
As noted by Paul Belleflamme, the capacities to innovate are greater with monopolies. Monopolies extract monopoly rents, thus they have more economic means by which they could invest in R&D and they enjoy potentially better foundations on which to implement R&D results. As competition becomes more intense, monopoly rents dissipate, and so do the capacities to innovate.
This being said, monopolies, especially of the kind which, given the current technologies, face no potential competition, have no incentive to invest in R&D.
I consider two additional reasons to the ones mentioned in the above (disruptive innovation and Arrow’s replacement effect):
1) Top managers of publicly traded companies, deciding on the R&D budgets must take into consideration their shareholders’ interests. The latter are primarily interested in the distribution of dividends. In the short run, increases in the distribution of dividends conflict with increases in R&D spending. Furthermore, there is no really convincing argument to be made for bridging an increase in spending on R&D and the shareholders’ interests in the long run. There is no risk that the monopolist might be outcompeted, thus the reproduction of current monopolistic rents and thus dividends in future is “safe”. Also, increases in profitability through cost reductions following successful process innovation are uncertain. Crucially, this potential improvement in profitability lies in the future and shareholders attach more value to present pay-offs since, in future there might be alternative investment opportunities that yield higher returns.
2) Furthermore, the absence of competition reduces the incentive for the “true” monopolist to use his resources efficiently. [Note that, as competition becomes more intense this incentive progressively becomes a necessity since efficient use of inputs is then required for the company’s survival.] This is what Harvey Leibenstein (1966) termed X-(In)efficiency. [Note that this is in opposition to orthodox economic theory which dictates that, irrespective of the market structure, and for a given output, companies use the available resources to minimize their costs.] As noted, by Leibenstein (1969: 600) “the existence of X-inefficiency implies that firms do not always introduce technical changes when available and profitable.” If they do not use these efficiency-increasing instruments that are readily available, such firms will not consider increasing their R&D efforts either.
Harvey Leibenstein (1966): Allocative Efficiency vs. “X-Efficiency”.
Harvey Leibenstein (1969): Organizational or Frictional Equilibria, X-Efficiency, and the Rate of Innovation.

At first glance, it is comprehensive that big companies don’t spend money in R&D in order to innovate in their business. There are no incentives to change your status if it is already fine.
Concerning the economic welfare, it is a pity that it is so. It means that every sector with a monopoly would not be the target of an innovation or at least not often as we would expect it.

For instance Windows has the monopoly in the operating systems for the personal computers. For more than a decade now, it is public awareness that their OS are well acclaimed once two. Windows XP was great, Vista was a failure, Windows Seven was the worthy heir of Xp and nowadays Windows 8 seems to follow the path of Vista (Windows is already developing a patch allowing people to install Seven on new pc’s running under Windows 8). The problem here is that consumers have to wait a couple of years for a new OS when the current is below the expectation. If there were more innovation, then there would be more products on the market in a short time lap. People could then have a wider choice: Do I buy a new pc with this current appealing OS or do I wait a year until the next OS comes out?

In my case, I know that the problem of OS is a restraint for buying a new pc. More innovations could raise the demand for the product itself but also for others, especially in the case of complementary goods. I think that it could have a positive effect on economic welfare.
Thus as a conclusion, I’ll say that it is not a certainty that a company loses to innovate even though we are in presence of a monopoly.