Innovative effort is important to both business strategy and economic progress. It is, therefore, not surprising that a large volume of research is dedicated to understanding what drives that effort. One strand of literature stresses the relationship between market structure, typically measured by number of firms, and innovation. In this talk, I will focus on a different aspect of market structure, namely the information possessed by firms, and its impact on the decision to adopt an innovation.
In particular, I will present a model of a Bertrand duopoly in which firms have the opportunity to invest a fixed sum in process innovation. The decision to invest may take place under two alternative scenarios. In the complete information scenario firms know each other's costs at the time of investment. In the incomplete information scenario each firm is privately informed of its cost. I will argue that in both scenarios the probability that both firms invest in (symmetric) equilibrium is positive. Moreover, we will see that the incomplete information scenario may be more conducive to investment than its complete information counterpart. This is indeed always the case provided market demand is sufficiently large.
DATE: Friday, February 25th, 2022
Meeting ID: 917 2469 7486