Market Structure, Innovation and Productivity : A Marriage with Chemistry

The ambiguous relationship between competition and innovation as they appear in the economics literature is discussed. Due to the ambiguity of the type of relationship (positive or negative) between these two features, the need for a more dynamic model is apparent. A review of the literature indicates that there is no straightforward relation between market structure and performance. Market structure and competition change as a result of firms' decisions regarding innovation. Furthermore, there is no single optimal market structure for one industry. Empirical evidence on competition and innovation for the Netherlands revealed that there exists a negative relationship between market share and productivity growth, and there is a significant positive correlation between competition and productivity growth. However, what these studies do not convey is the effect one factor (competition) might have on the other (innovation). The following conclusions are made: (1) competition and innovation are key determinants of productivity growth, and (2) market structure and the degree of competition vary according to firms' innovation decisions. An optimal market structure, therefore, should incorporate characteristics of the markets, technology, and other industries to portray the trade-off between competition and innovation.(NEE)