Discretely innovating: The effect of limited market contestability on innovation and growth

This paper considers the impact of market contestability on innovation and growth. To examine this discrete entry (i.e. an integer number of firms) is used as a tool to vary contestability in each sector of a disaggregated multi-sector endogenous growth model. Contestability affects entry, extending results beyond competition. As a result, sectors with lower contestability have lower innovation and sectors characterized by Cournot oligopoly have lower innovation than sectors characterized by Bertrand. The effect of contestability is in addition to the effects of competition. Entry requirements become a consideration for innovation and growth policy, particularly in small or isolated economies.

This paper was published December 2018, and updated July 2021.