Technological Progress in Races for Product Supremacy

How does market structure affect quality innovation efforts and social welfare? This study considers three allocation mechanisms in a model of dynamic quality innovation: monopoly, duopoly, and the social planner. In this model, quality advances depend upon a stock of accumulated know-how, allowing for more flexible innovation strategies and direct comparisons of technology frontiers which show the largest reachable know-how stocks. When products are perfectly substitutable, the technology frontier is highest under the social planner, lower under duopoly, and lowest under monopoly. However, when products are less substitutable, a duopoly may surpass the technology frontier under the social planner along an unbalanced innovation path. Ex-ante and long-run social welfare are always highest under the social planner and lowest under monopoly.