The Invariance of R&D to the Number of Firms in the Industry
NBER Working Paper No. 1798 (Also Reprint No. r0962)
Thi spaper presents certain remarkably simple results concerning market's allocation to R&D and its comparison to socially efficient allocations. We posit that a firm can undertake more than one project aimed at the same innovation, and consider a product market characterized by Bertrand competition. Among the results we obtain is that the market R&D (that is, the number of projects undertaken, and the effort spent on different projects) is invariant to the number of firms. We also examine the effects of the number of firms on the gains from innovation to consumers, firms, and society, and show, in particular, that the market undertakes less R&D than is socially desirable.
Published: Sah, Raaj Kumar and Joseph E. Stiglitz. "The Invariance of Market Innovation to the Number of Firms," Rand Journal of Economics, Vol. 18, No. 1, Spring 1987, pp. 98-108.