The Nexus Between Innovation and Competition: Will the New Digital Technologies Change the Relationship?

There has been a long and extended empirical literature examining the impact of competition on innovation. I argue that as innovation is the way firms compete, this question does not make a lot of sense and it is not surprising the empirical literature has not found stable results. I argue we should be asking what affect does (digital) innovation have on the creation of new products and better processes – both of which are good for well-being. We should also be asking whether this form of innovation also accelerates the tendency toward larger firms and more concentrated markets – neither of which may be good for income equity and civil society.

By Elizabeth Webster¹

I. INTRODUCTION

As topics for discussion, innovation and competition have long been intertwined. Will innovation produce the behemoths that choke competition and lead to the dominance of fewer and fewer firms? Does ruthless competition between near-identical firms smother the profits needed for risk taking? Will the shift from mechanical and electronic platforms towards digital ones exacerbate these trends?

In this article, I examine how the competition – innovation debate has progressed and suggest that the (voluminous) research which tests whether lack of competition holds back innovation is possibly asking the wrong question. I then look briefly at whether the recent new wave of digital innovation is creating larger firms and more concentrated markets.

II. HOW