Date Added: Jul 2010
This paper studies information acquisition under competitive pressure and proposes a model to examine the relationship between product market competition and the level of innovative activity in an industry. Recent empirical papers point to an inverted-U shape relationship between competition and innovation. The paper offers theoretical support to these results while employing a more accurate definition of innovation than the previous literature; more precisely, the authors isolate innovation from riskless technological progress. The firms in the model learn of an invention and decide on whether and when to innovate. In making this decision, firms face a trade-off between seeking a first-mover advantage and waiting to acquire more information.