Market Structure and Innovation

Abstract

The study of the relationship between market structure and innovation by economists is a relatively recent phenomenon that can be traced back to the mid-1950s. Prior to that time the bulk of economic analysis took the number of products and their means of production as determined exogenously, just as consumers’ tastes were taken as an exogenous given. With a few exceptions, economists appeared to be unconcerned with the economic incentives that determined the pace and direction of innovation despite the fact that this activity had begun to be institutionalized about 1876, when industrial research laboratories began to be established both in the United States and in Europe. The exceptions include Taussig (1915), Hicks (1932), Galbraith (1952), and most importantly Schumpeter (1961, 1964, 1975). It was Schumpeter who argued most persuasively that it was competition through introduction of new products and methods of production that was far more important than price competition, in the long run. For it was through innovative activity that economic development that resulted in higher per capita income took place.