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A new rationale for the persistence of monopolies is based on a precommitment of the incumbent monopolist to invest in RD. In a patent race, as long as entry is free, the Arrow effect disappears: the incumbent has more incentives to invest than any outsider. Paradoxically, a market with some persistence of monopoly is competitive, while one with continuous leap-frogging must hide some barriers to entry. When the size of innovations is endogenous, leaders invest in more radical innovations. If there is a sequence of innovations, cycling investment emerges. Finally, I apply the idea to a general equilibrium model of Schumpeterian growth with persistence of monopoly. Who does research? Overwhelming evidence tells us that incumbent monopolists do a lot of research and their leadership persists through a number of innovations. This persistence of the monopolistic position drives the incentives to invest in Research Development and indirectly enhances aggregate growth. Nevertheless the industrial organisation theory of innovation since the pathbreaking contri-bution of Arrow (1962) and the macroeconomic theory of Schumpeterian growth started by Aghion and Howitt (1992) do not provide clear arguments as to why
Federico Etro (Thu,) studied this question.