Foundations and Trends® in Microeconomics > Vol 5 > Issue 6

Is Competition Good for Innovation? A Simple Approach to an Unresolved Question

By Armin Schmutzler, University of Zürich, Switzerland,

Suggested Citation
Armin Schmutzler (2010), "Is Competition Good for Innovation? A Simple Approach to an Unresolved Question", Foundations and Trends® in Microeconomics: Vol. 5: No. 6, pp 355-428.

Publication Date: 30 Aug 2010
© 2010 A. Schmutzler
Industrial Organization,  Competitive Marketing Strategy
L13 Oligopoly and Other Imperfect MarketsL2 Firm Objectives, Organization and BehaviorL22 Firm Organization and Market Structure
CompetitionInvestmentCost reductionIndustrial organizationTechnology and innovationPublic policy

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In this article:
1 Introduction 
2 Ex post versus Ex ante Competition 
3 A Simple General Framework 
4 Learning from Examples 
5 Asymmetric Firms 
6 Extensions 
7 Evidence 
8 Conclusions 


The relation between the intensity of competition and R&D investment has received a lot of attention, both in the theoretical and in the empirical literature. Nevertheless, no consensus on the sign of the effect of competition on innovation has emerged. This survey of the literature identifies sources of confusion in the theoretical debate. My discussion is mainly based on a unified model that simplifies the comparison of different results. This model is also applied to show which factors work in favor of a positive relation between competition and innovation.

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Table of contents:
1. Introduction
2. Ex-post vs. ex-ante competition
3. A Simple General Framework
4. Learning from Examples
5. Asymmetric Firms
6. Extensions
7. Evidence
8. Conclusions

Is Competition Good for Innovation?

Is Competition Good for Innovation? investigates the relation between competition and innovation. It provides a simple framework that helps to understand two issues: 1. What are the sources of the ambiguous relation between competition and innovation? 2. Which factors are conducive to a positive relation between competition and innovation? Chapter 2 identifies the first source of ambiguity between competition and innovation. In Chapter 3 the author reviews a simple framework that is general enough to contain the simple introductory examples and many familiar models from the literature as special cases. Chapter 4 considers several simple examples – the examples help to understand the different possible meanings of competition, that the effects of competition on innovation are ambiguous, and to identify the sources of ambiguities. Chapter 5 extends the analysis to deal with asymmetric firms. Chapter 6 treats various extensions of the simple framework that have received some attention in the literature. Chapter 7 moves towards the empirical literature and will also summarize a few contributions that have dealt with the relation between competition and innovation in laboratory experiments. Chapter 8 provides concluding remarks.