Policies for the development of RES in the European Union - The Sustainability of Renewable Energy in Europe - page 75

• Competition implies that there is an exchange of information between firms,
with the risk that new products can be copied less than a patent that protects the
firm that innovates, but in this case there is no more competition.
In general, it can be said that the competition might promote innovation but in real-
ity this is not always true because a lot of innovation came from monopolies.
The Lee and Wilde ( 1980 ) model is a one-shot noncooperative game in which
there are n identical firms that invest in R&D in order to innovate first. The firm that
innovates first wins an exogenously given price. Firms that have not arrived first
instead get nothing and even lose what they have invested, that is the cost in R&D.
The authors assume that there is an infinite and perfect protection of the patent. The
probability of success of the representative firm is a function of its spending on
R&D; this expenditure is a flow cost that the representative firm pays until a player
earns a win. The authors show that an increase in the number of firms increases the
equilibrium relative to the individual effort in R&D. Furthermore, assuming that the
social benefit of innovation is equal to the price obtained by the winner, Lee and
Wilde show that the equilibrium industry firms invest more than what is socially op-
timal. These results clearly depend on the assumptions of the model, which means
the price is exogenous and independent of the number of firms, those who lose they
get nothing, and so on.
Delbono and Denicolo ( 1991 ) follow the basic model of Lee and Wilde but do
not reach the same conclusions. They show that an increase in the number of firms
may lead to a reduction in the equilibrium R&D effort of each firm and in the equi-
librium total effort; in equilibrium, there may be underinvestment with respect to
the social optimum.
In general, theories of industrial organization believe that innovation can reduce
the competition while empirical studies find that innovation increases.
Aghion et al. ( 2005 ) analyze the relationship between product market competi-
tion and innovation, finding a strong evidence of an inverted-U relationship. The
authors assume that both the current technological leaders and their followers in
any industry can innovate, and innovations of leaders and followers take place step
by step. Incentives for innovation depend on the difference between post-innova-
tion and pre-innovation rents of incumbent firms. In this case, greater competition
can stimulate innovation and growth, because it can reduce a firm's pre-innovation
rents by more than it reduces its post-innovation rents. This means that competition
may increase the incremental profits from innovation and thus encourage invest-
ment in R&D aimed to gain market share. This reasoning should be especially true
in areas where the incumbent firms operate with fairly similar levels of technol-
ogy; in these areas, pre-innovation rents should divert product competition. On
the other hand, in areas where innovations are made by laggard firms with already
low initial profits, product competition may affect the post-innovation rents, and
therefore can dominate the effects on Schumpeterian competition. In conclusion,
the authors find that competition and innovation are characterized by an inverted-
U shape, with the industry growing distributed on both sections that decrease the
U-shape.