Loury (1979) - Market Structure And Innovation

Reference(s)

• Loury G.C.(1979), "Market structure and innovation", Quarterly Journal of Economics, 93, pp. 395-410. (pdf)

Abstract

In the application of conventional economic theory to the regulation of industry, there often arises a conflict between two great traditions. Adam Smith's "invisible hand" doctrine formalized in the First Fundamental Theorem of Welfare Economics supports the prescription that monopoly should be restrained and competitive market structures should be promoted. On the other hand, Schumpeter, in his classic Capitalism, Socialism and Democracy, takes a dynamic view of the economy in which momentary monopoly power is functional and is naturally eroded over time through entry, imitation, and innovation. Indeed the possibility of acquiring monopoly power and associated quasi rents is necessary to provide entrepreneurs an incentive to pursue innovative activity. As Schumpeter put it, progress occurs through a process of "creative destruction." An antitrust policy that actively promotes static competition is not obviously superior to laissez faire in such a world. This leads one to ponder what degree of competition within an industry leads to performance that is in some sense optimal. This question has been extensively studied in the literature concerning the relationship between industrial concentration and firm investment in research and development.' Both theoretical and empirical studies have suggested the existence of a degree of concentration intermediate between pure monopoly and atomistic (perfect) competition that is best in terms of R & D performance.