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

JournalScottish Journal of Political Economy
AuthorsSteven Bond-Smith
PublishedNovember 2021

I consider the impact of market contestability on innovation and growth.

To examine this, I use discrete entry (i.e. an integer number of firms) 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.