Competing Inventors and the Incentive to Invent

This paper introduces a comprehensive model of the market for inventions that examines how both supply-side competition and demand-side competition affect the incentive to invent. Supply-side competition refers to competition among inventors and demand-side competition refers to competition among producers in the downstream product market. The main results are as follows. Competing inventors have greater average expected returns to invention when the downstream market is competitive than when the downstream product market is monopolistic, so downstream competition increases the incentive to invent. A multi-project monopoly inventor has greater incremental expected returns to invention when the downstream market is competitive than when it is monopolistic, so downstream competition again increases the incentive to invent. On the supply side, competition among inventors generates more R&D projects than a multi-project monopoly inventor, when the demand side of the market for inventions is a competitive. The reason for this result is that when the downstream market is competitive, the average expected returns to invention with competition among inventors are greater than the incremental expected returns to invention with a multi-project monopoly inventor.