References and Literature
The literature on R&D in industrial organization is vast, and my purpose in this chapter has not been to review this literature, but to highlight the salient features that will be used in the remainder of the book.
The reader who is interested in this area can start with Tirole (1990, Chapter 10), which contains an excellent discussion of the contrast between private and the social values of innovation. Tirole also provides an excellent introduction to patent races, which will be discussed in Section 14.4 in Chapter 14. A more up-to-date reference that surveys the recent developments in the economics of innovation is Scotchmer (2005).The classic reference on the private and social values of innovation is Arrow (1962). Schumpeter (1943) was the first to emphasize the role of monopoly in R&D and innovation. The importance of monopoly power for innovation and the implications of the non-rival nature of ideas are discussed in Romer (1990, 1993) and Jones (2006). Most of the industrial organization literature also emphasizes the importance of ex post monopoly power and patent systems in providing incentives for innovation. See, for example, Scotchmer (2005). This perspective has recently been criticized by Boldrin and Levine (2003).
The idea of creative destruction was also originally developed by Schumpeter. Models of creative destruction in the industrial organization literature include Reinganum (1983, 1985). Similar models in the growth literature are developed in Aghion and Howitt (1992, 1998).
Chamberlin (1933) is the classic reference on monopolistic competition. The Dixit-Stiglitz model is developed in Dixit and Stiglitz (1977) and is also closely related to Spence (1976). This model was first used for an analysis of R&D in Dasgupta and Stiglitz (1979). An excellent exposition of the Dixit-Stiglitz model is provided in Matsuyama (1995). Tirole (1990, Chapter 7) also discusses the Dixit-Stiglitz-Spence model as well as other models of product innovation, including the Salop model, due to Salop (1979), which is presented in Exercise 12.14.
A stimulating general discussion of issues of innovation and the importance of market size and profit incentives is provided in Schmookler (1966). Recent evidence on the effect of market size and profit incentives on innovation is discussed in Popp (2002), Finkelstein (2003) and Acemoglu and Linn (2004).
Mokyr (1990) contains an excellent history of innovation. Freeman (1982) also provides a survey of the qualitative literature on innovation and discusses the different types of innovations.
The rest of this part of the book, like this chapter, will focus on monopolistic environments, where the appropriate equilibrium concept is not the competitive equilibrium, but one that incorporates game-theoretic interactions. Since all games in this book will have complete information, the appropriate notion of equilibrium is the standard Nash Equilibrium concept or when the game is multi-stage or dynamic, it is the Subgame Perfect (Nash) Equilibrium or a refinement of this concept, the Markov Perfect Equilibrium. In these situations, equilibrium always refers to a Nash Equilibrium or a Subgame Perfect Equilibrium and I typically do not add the additional “Nash” qualification. The treatment here presumes that the reader is familiar with these concepts. A quick introduction to the necessary game theory is provided in the Appendix of Tirole (1990), and a more detailed treatment can be found in Fudenberg and Tirole (1994), Myerson (1995) and Osborne and Rubinstein (1994). A brief overview of dynamic (infinite-horizon) games is provided in Appendix Chapter C.
12.8.