The invariance of market innovation to 
the number of firms

Raaj Kumar Sah and Joseph E. Stiglitz

RAND Journal of Economics, Volume 18, Number 1, Spring 1987, pages 98-108.

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ABSTRACT

This article provides a set of conditions under which the R&D undertaken in a market economy is invariant to the number (or size distribution) of firms and the market's allocation is efficient (i.e., given the aggregate expenditure, the market chooses socially optimal projects). As in several patent race studies, we assume that a "winner-takes-all" competition determines firms' gains, but our model differs from earlier studies in that firms are not restricted to undertake only one research project. Our analysis shows that how one characterizes a firm's choices (and innovation technologies) has a strong influence on the conclusions one draws from economic analyses of R&D.


Previous working versions include:

“The invariance of R&D to the number of firms in the industry.” National Bureau of Economic Research, Cambridge, MA. NBER working paper series, Working paper number 1798. June 1986.

“The invariance of R&D to the number of firms in the industry: Equilibrium and efficiency under Bertrand competition.” Yale University, School of Organization & Management. Economics of organization, Working paper series D, Working paper number 11. June 1985.