Incentive for innovation: Competition, Innovator's Efficiency, and the Labour Market Conditions

This doctoral research is an attempt to improve the understanding of why firms invest in innovative processes, why they adopt them, and how their choices impact on Social Welfare. More in detail, chapter 1 deals with the effect of downstream competition on innovation diffusion (licensing), the market power accumulation of the inventors, and the impact of innovation on Social Welfare. I show that competition affects both the size of the innovation (positively) and its diffusion among the producers (negatively). Also, the results of this chapter suggest that policy makers have reasons to be concerned about the market power accumulation of the innovators, in particular when their innovations are sold to competitive sectors. Consistently with the results in IMF [2019], I suggest that weak pro-competitive policies may be ineffective to tackle this issue, as they trigger the inventors to raise barriers to entry in the producers' sector and reduce the diffusion of the new technology in order to preserve their market power. Furthermore, innovators benefit from competition more than consumers and producers. I show that there is a “subsidy” effect of competition on innovation that makes technologies developed by an inefficient innovator impact more heavily on Social Welfare. Therefore, weak pro-competitive policies in the product market may result in further market power accumulation and lower benefits for consumers. Similar results are obtained by looking at competition as the horizontal differentiation between two products. In the appendix to chapter 1, I add product differentiation as an alternative measure of competition. I show that the incomplete adoption of a superior technology is associated to high degree of product substitutability (intense competition), while large product differentiation (soft competition) promotes the full adoption of the new technology. In chapter 2, I deal with the connection between the wage rate and the incentives to invest in innovation. By means of a model of competition in a vertically related industry, I design technological progress as the introduction of a qualitatively superior capital input in the production process; quality is measured in terms of the number of workers employed together with the capital input to produce a unit of output. When the quality of capital rises, the labour demand is subject to two opposite forces: on the one hand, firms require less labour to produce a unit of the final good and demand falls. On the other hand, by reducing the cost of labour per unit of output, the firms' best reply shifts outwards and their output rises, increasing the labour demand. This trade off summarises the discussion about the effects of technological improvements depending on the type of innovation. Moreover, chapter 2 addresses the problem of what the incentives that make firms invest in labour-saving innovations are. Similarly to Lordan and Neumark [2018], I show that the price of labour triggers new labour-saving technologies. However, results suggest that, under certain conditions, new technologies may increase the production level and, ultimately, the labour demand. Both chapter 1 and chapter 2 adopt a theoretical I.O. perspective, with a focus on innovation in vertical market, in order to investigate the role and the effects of technological progress on supply chains and industrial relations. I believe this research contributes to a better understanding of why firms decide to adopt a new technology and how innovators exploit the producers' incentives in order to maximise their payoffs. This doctoral thesis must be understood as a first step towards a better comprehension of industrial and firm-labour relations. I show how market structure affects the diffusion of a new technology and, more importantly, how it modifies the channels through which innovation contributes to Social Welfare. Finally, I show how labour market and innovation mutually influence each other as well as the forces that operate in order to transform an increase in the wage rate into a larger investment by the inventor.