Technological Progress in Races for Product Supremacy

How does market organization affect quality innovation efforts and social welfare? Three stochastic dynamic market structures considered are monopoly, duopoly, and social planning. Products can be either linearly or nonlinearly substitutable. The introduction of a step function allows richer innovation strategies. First, given nonlinear substitution, a duopoly may follow an unbalanced evolution path and have a technology frontier not dominated by that in social planning. This result does not hold for the linear substitution case. Second, ex ante and long-run welfare values are always the highest in social planning and the lowest in monopoly. Thus, policies should encourage static and dynamic competition.