Impact Of Market Structure On Product Innovation

Product innovaton is an important impetus for development of economies.The impact of market structure on product innovation does not only attract attention of academic circles,but also is a topic with practical significance in the ground of current economic development of China.Aiming to shed light on the influence of market structure on product innovation,this paper focuses on difference between the quality of new products under monopolistic structure and that under competitive structure after product innovation and related welfare impact.Besides comparing the poduct innovation of respective incumbents under different market structures,this paper also analyses in detail the impact of market structure on product innovation of potential entrants.The new product considered in this paper differentiates horizontally from the original one.Given the quality of initial product and the horizontal difference beween two products,the innovator need decide the quality of new product according to exogenous complexity of R&D.Modeling analysis shows that the results of superity comparison between two market structure about product innovation not only depend on the standards of evaluation,but also change with the variation of exogenous factors including,for instance,R&D complexity of new product and horizontal difference between two products.Monopolistic incumbent compared to competitive one can provide new product with higher quality,but monopoly leads to lower consumer surplus when the horizontal difference between two products is not significant enough.If the new product is invented by a potential entrant,only when the complexity of innovation is high can monopolistic condition generate higher quality of new product than competitive condition,while consumer surplus may shrink after the entrant's innovation on monopolistic condition.With regard to the innovation from an incumbent,the quality of new product in monopolistic structure is higher than or equivalent to that in competitive structure,and strictly higher when R&D complexity is high.Given the complexity of innovation,the producer surplus is higher in monopolistic structure than that in competitive structure after the endogenous innovation is considered.However,only when the difference between new product and initial product is large,can monopolistic structure gegerate higher consumer surplus and higher social welfare.When the difference between two products is small,consumer surplus in monopolistic structure is lower than that in competitive structure.This paper also analyses respectively in different structures the potential entrant's dicision about the quality of new product in the process of entering market through providing the new product.After innovation there would be price competition between the entrant and the incumbent.Analysis about the endogenous quality of new product shows that in monopolistic structure the quality of new product and R&D investment are not always higher though the incentive to innovate is always higher than that in competitive structure.Only when innovation is difficult would the potential entrant in monopolistic structure provide new product with higher quality because the lenitive competition from monopolistic incumbent allows higher promit for the innovator.When the complexity of innovation is light,in monopolistic structure mitigated competition induces the sluggishness of the entrant to innovate,leading to lower R&D investment and lower quality of new product compared to that in competitive structure,with lower consumer surplus but higher producer surplus.In competitie structure the appearance of innovation could always increase the consumer surplus and social welfare.However,when innovation is complex and difficult in monopolistic structure consumer surplus gets lower after innovation because two products are both on high price,and with the arising of new product making the original producter on a higher price in monopolistic structure,the competitive structure with no innovation happening is better for consumers.In the situation of monopoly,if both original and new products have low quality after innovation of potential entrant,the entrant and original incumbent would employ retreat strategy,with which they set high prices to avoid fierce competition because the increament of market share from a low price doesn't compensate the loss with it.The monopolistic structure with low quality of original product provides a slot for both product innovation of potential entrant and high prices in the market after innovation,which is good to innovation but hurts the surplus of consumers.More attention should be paid to this special situation by the policy makers.