Innovation and Product Market Concentration: Schumpeter, Arrow and the Inverted-U Shape Curve

We investigate the relationship between market concentration and industry innovative effort within a familiar two-stage model of R&D race in which firms compete à la Cournot in the product market. With the help of numerical simulations, we show that such a setting is rich enough to generate Arrovian, Schumpeterian, and inverted U curves. We interpret these different patterns on the basis of the relative strength of the technological incentive and the strategic incentive. We then bridge our theoretical results and some recent empirical research.