Competition, Market Selection and Growth

Abstract

We study the effect of the competitive selection process on the economy’s rate of growth. In an extension of standard quality‐ladder models of endogenous growth, we allow for the possibility that in each period several asymmetric firms (representing an endogenously determined number of past innovators) may be simultaneously active in an industry. Stronger competitive pressure then has conflicting effects on the incentive to innovate, lowering prices but also selecting the more efficient firms. We show that the market selection effect of competition always increases the incentive to innovate and find circumstances in which it can outweigh the traditional negative effect of lower prices.