Innovation Timing Essay Example

disorders, infections, skin issues, nervous system disorders, diabetes, and immune system disorders. From an Industrial Organization perspective, there is a question about whether an economic environment with large companies and some level of market concentration outperforms perfect competition in terms of dynamic efficiency. Arrow can be considered as the two main researchers studying this matter.

The majority of the literature on innovation, especially in the Industrial Organization framework, centers around the two Schumpeterian Hypotheses (Schumpeter, 1942). The first hypothesis focuses on the connection between innovation and monopoly power, stating that a concentrated market structure promotes innovation. The second hypothesis examines the relationship between firm size and the willingness to invest in innovation activities. According to Shumpeter (1942), monopolists have a higher likelihood of attracting qualified scientists and technicians and face fewer financial constraints. Research and development (R&D) investments are inherently riskier than investments in physical capital. However, potential revenues from successful innovations are usually very high (Sherer et al. 2000). Therefore, firms capable of bearing risk and financing their investments are more likely to engage in innovation. These firms can leverage their existing market power to acquire resources for R&D. The result of this process allows firms to maintain their market power, generate higher profits that further boost R&D investment, and increase the likelihood of continuous innovation.

(Crespi; 2004,p. 7) Arrow (1962a) discovered that perfect competition provided the greatest motivation for innovation. According to his findings, a monopolistic firm is less likely to invest in research and development compared to a competitive firm. The reason behind this is that a monopolist already earns guaranteed profits from its monopoly position even before any innovation takes place. On the

other hand, under perfect competition, all profits are generated by the introduction of an innovation, thus creating greater incentives to invest in research and development.

According to Crespi (2004, p. 8), a monopolist earns less profit from an innovation compared to a new entrant. This is because the monopolist only replaces a portion of their existing profits, while for the new entrant, the profits from the innovation are entirely new.