Competition and Innovation: Did Arrow Hit the Bull's Eye?

Abstract

The only ground for arguing that monopoly may create superior incentives to invent is that appropriability may be greater under monopoly than under competition. Whatever differences may exist in this direction must, of course, still be offset against the monopolist’s disincentive created by his preinvention monopoly profits. —Arrow (1962, 622) As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns... and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down. —Schumpeter (1942, 82) The fiftieth anniversary of the publication of NBER Rate and Direction

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