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The University of Southampton
EconomicsPart of Economic, Social and Political Science

1005 Innovation and Competition in a Memory Process (J. A. Correa)

Discussion Paper 1005, "Innovation and Competition in a Memory Process", by Juan A. Correa

Does innovation boost or fall with more competition when innovation follows a memory process? This paper provides a theoretical model which analyzes the innovation and competition relationship assuming that innovation follows a short-memory process. I find innovation increases with more product market competition, even under unpriced spillovers. Assuming the probability to innovate increases with past innovations; a follower firm has large incentives to innovate, even in a highly competitive environment, since the memory obtained after innovating increases its probability to innovate again and become a leader. Therefore, industries will be most of the time neck-and-neck where firms innovate to escape from competition. Using the same dataset of Aghion et al. (2005) I also find there is a positive empirical relationship between innovation and competition. In the case of memoryless industries, I show there is no significant relationship between innovation and competition.

Keynames: innovation, R&D, competition, memory process

JEL Classification: D43, L11, O31.

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