Waves of Creative Destruction: Customer Bases and the Dynamics of Innovation, Issue 4782
This paper develops a model of repeated innovation with knowledge spillovers. The model's novel feature is that firms compete on two dimensions: 1) product quality or cost, where one firm's innovation ultimately spills over to other firms; and 2) distribution costs, where there are no spillovers across firms and where incumbent firms' existing customer bases give them a competitive advantage over would- be entrants. Customer bases have two important consequences: 1) they can in some circumstances dramatically reduce the long-run average level of innovation; 2) they lead to endogenous bunching, or waves, in innovative activity.
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Aghion and Howitt assumption bargaining power Bertrand competition bunching of innovations Bureau of Economic competitive advantage conditional probability contrast copycat firms cost structures costs are proportional CREATIVE DESTRUCTION David H decreasing function developed innovation development cost development in period displaces distribution cost advantage DYNAMICS OF INNOVATION Economic Research endogenous entrant in period entry in period equilibrium development rules established firms example expected profits firm's given gopher server Gort and Klepper growth incumbent firm industry innovation in period innovative activity instructions inside invention in period learning-by-doing level of innovation long-run average level lower marginal costs Macroeconomic market in period market share marketable innovations National Bureau NBER Working Papers newcomers non-marketable innovations number of firms older incumbent period t+1 periods old positive externality post-development potential entrant probability of development production costs production technology round of innovation Schumpeter shakeup externality spillovers across firms Stage Stylized Fact Trade Wage WAVES OF CREATIVE