Market structure and incentives to innovate: the case of Cournot oligopoly

In a classical paper, Arrow (The Rate and Direction of Inventive Activity, 1962, Princeton University Press, pp. 609–626) showed that the benefit of innovation to the single firm with R&D capabilities is higher under perfect competition than under monopoly. Arrow in essence assumed Bertrand (price) competition. In this paper, I examine Cournot (quantity) competition and show that, under weak conditions, the benefit of a small process innovation decreases with the number of firms. I also show that the elasticity of the slope of the inverse demand function plays a critical role in determining the effect of product-market competition on the incentives to innovate.