Competition and innovation: allies or foes? A case study of Indian manufacturing sector
Nair, Anoopa S.
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The fundamental building block of the economic theory of competition is that the most ideal condition of competition is represented by perfect competition. It refers to a situation in which the market is characterized by the presence of a large number of sellers selling homogenous products. Economists held the view that perfect competition was the best possible market structure in which an optimal resource allocation could be achieved (Cohen and Levin, 1989). Also, this interpretation of competition suited the static view of competition of the early periods of the evolution of the concept of competition. However, this view was severely shaken in 1942 when Schumpeter opined that, “ the atomistic firm operating in a competitive market may be a perfectly suitable vehicle for static resource allocation, but the large firm operating in a concentrated market was the most powerful engine of progress and….long run expansion of output.” The major aspect of this view was that it marked a major shift from the static to dynamic conceptualization of competition. In a dynamic setting, competition needn’t necessarily be characterized by a large number of players. Instead, competition is characterized by the presence of players who have the potential to innovate and keep their rivals up on their toes. In this scenario, players who have the ability to innovate find that their production costs fall resulting in them able to capture a greater market share. Meanwhile, the players who are unable to innovate fail to survive in the market resulting in them leaving the market. The result in innovation plays a key role in reducing the number of market players in a particular good resulting in the creation of a concentrated market structure. To the proponents of a static competition framework, this would indicate a sure sign of a fall in competition. However, the dynamic competition theorists opine that a concentrated market structure can indicate a substantial degree of competition among the few players in operation. The emergence of greater competition in concentrated market structure resulting in innovation which plays a crucial role in a country’s long term economic growth was a direct challenge to the antitrust orthodoxy prevalent during that time
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