This paper studies the evolution of a competitive industry in which a fixed number of firms reduce costs by innovating and by imitating their rivals' technologies. As the firms' technologies gradually improve, industry output expands and price falls. Technological leaders tend to rely on...

Firm numbers first rise, then later fall, as an industry evolves. This nonmonotonicity is explained using a competitive model in which innovation opportunities fuel entry and relative failure to innovate prompts exit; equilibrium time paths for price and quantity also share features of the data....