Lecture Slides Rui Baptista Microeconomics and Corporate Analysis Notes on The Economics of Technology Lecture Slides Rui Baptista

Schumpeter’s Theory of Innovation Innovation incessantly revolutionises the economic structure through a process of creative destruction The entrepreneur is defined as the single responsible for innovation, that is, for the economic use of new scientific knowledge Innovation is incremental and cumulative

Schumpeterian Hypotheses There is a positive relationship between innovation and monopoly power and profit Large firms are more than proportionately more innovative than small firms

Demand-Pull vs. Technology-Push Innovations originate in the firm’s production and marketing departments The pace of innovation (and product life-cycles) is determined by market opportunities Technology-Push Innovations originate in the firm’s research staff The pace of innovation (and of product life-cycles) is determined by the scientific base

Key Dimensions of Innovative Activity Uncertainty: associated with whether and when R&D will generate new technology and with the impact of the innovation - cost structures, market demand, rival reaction Appropriability: how far can the firm internalise the returns from innovating, and how fast will rapid imitation reduce those returns Timing: learning and development costs, associated with uncertainty, might confer an advantage to later adopters or, at least, to “fast-seconds”

The Incentive to Innovate: Arrow’s Conclusions Non-competitive markets will be less innovative than competitive ones A social optimum can only be achieved when no price is charged for innovations

The Incentive to Innovate

The Pace of Development and the Timing of Innovation How is the optimal pace of innovation affected by the competitive environment in which firms act? Do monopolistic and oligopolistic industries innovate more rapidly than competitive ones, and how do they compare to what is socially optimal?

Timing of Innovation

Patent Races The larger the expected profit from introduction, the greater the probability of innovating first The smaller the profit from the present product/technology, the greater the probability of innovating first The larger the difference between present and expected profits (after introduction), the greater the loss from being beaten to the market

Technological Knowledge as a Public Good Non-rivalry: the cost of replicating new technology is usually trivial when compared with the cost of creating it in the first place Incomplete Excludability: property rights can be assigned by law to the creators of new ideas; however, technology determines how easy it is to prevent unauthorised use

Technological Opportunity and Spillovers Spillovers occur whenever a firm shares knowledge with other bodies performing R&D, without having to pay for that information in a market transaction The technological opportunity of each firm is the “pool of knowledge” available in the environment for the firm to draw upon The various sources of knowledge spillovers make for a technological infrastructure that supports innovative activity and economic growth

A Model of Patent Protection

Technology and Network Externalities

Market Evolution under Network Externalities