Publication details

Competition, Innovation and Technology Gap


KRČÁL Ondřej

Year of publication 2010
Type Article in Proceedings
Conference Mathematical Methods in Economics 2010, part II
MU Faculty or unit

Faculty of Economics and Administration

Field Economy
Keywords competition; innovation; inverted-U relationship; composition effect
Description In this paper, we present a prospect theoretical model of managerial decision that explains the inverted-U relationship between competition and innovation, and the negative relationship between competition and technology gap (composition effect). If competition is high, managers prefer small innovations because they are afraid of loss (loss aversion). If competition is low, managers choose small innovations because of low value attributed to additional increase in their incomes due to successful innovation (diminishing sensitivity). Firms facing intermediate levels of competition choose larger innovations. Composition effect is a consequence of the inverted-U relationship. If competition is intense (industry firms have low profit ex-pectations), technology leaders innovate more than laggards because they are less afraid of loss, and the resulting technology gap is high. As competition decreases, laggards are increasingly more active and finally, along the decreasing part of the inverted-U curve, start to innovate more.

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