Intensity of competition and the incentive to innovate

The effects of intensity of product market competition on R&D incentives are analysed in a model capturing the strategic interactions between firms with different cost levels. First, four axioms are proposed that a measure of intensity of competition should satisfy. Then the effects of intensity of competition on the value of the innovation are analysed. And it is shown that the axioms imply the existence of a non-monotone relation between intensity of competition and the value of an innovation. (C) 2001 Elsevier Science B.V. All rights reserved.