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Barriers to imitation and the incentive to innovate

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When innovation is followed by imitator entry, the degree to which the innovator can appropriate the rents induced by its innovations influences the rate of innovative activity. Our interest focuses upon the interaction between the innovation and imitation, in a model in which innovative activity generates a sequence of new innovations in the face of market saturation and discounting. The optimal rate of innovation depends upon four distinct economic forces: the appropriability effect stressed in the literature, fighting market saturation, a competitive motivation (to maintain the monopoly position), and a strategic motivation (to deter entry). The goal of our analysis is to elicit the circumstances in which each force dominates. Because of these countervailing forces, the optimal rate of innovation may not be monotone in the delay l; furthermore, a more easily satured market can benefit the innovator

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