This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. AEA Papers and Proceedings
  4. May 2021
  5. Arrow Meets Hotelling: Modeling Spatial Innovation

AEA Papers and Proceedings

ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)

Menu

Arrow Meets Hotelling: Modeling Spatial Innovation

  • Steven Callander
  • Nicolas Lambert
  • Niko Matouschek
AEA Papers and Proceedings
vol. 111, May 2021
(pp. 538–43)
Download Full Text PDF

Abstract

We combine a spatial model of innovation with Hotelling's model of competition. Innovations are vertically and also horizontally differentiated. Potential innovators choose not only whether to innovate but also how to innovate. The bolder they are with a new product, the riskier is the outcome but the softer will be the resulting market competition with existing products. We use the model to explore the interaction of competition and innovation and address several classic questions. The recurring finding is that increased market competition drives not only more innovation but more novel and riskier innovation that offers a higher chance of breakthrough outcomes.

Citation

Callander, Steven, Nicolas Lambert, and Niko Matouschek. 2021. "Arrow Meets Hotelling: Modeling Spatial Innovation." AEA Papers and Proceedings, 111: 538–43. DOI: 10.1257/pandp.20211051

Additional Materials

JEL Classification

  • R12 Size and Spatial Distributions of Regional Economic Activity
  • R32 Other Spatial Production and Pricing Analysis
  • O31 Innovation and Invention: Processes and Incentives
  • L11 Production, Pricing, and Market Structure; Size Distribution of Firms
  • D21 Firm Behavior: Theory