Journal Article

Competition and innovation: an inverted U relationship

Date: 01 May 2005
Publisher: Oxford University Press
Published in: Quarterly Journal of Economics , Vol. 120, No. 2, pp. 701-728
Dataset: Download dataset

This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model-that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck-are both supported by the data.

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