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  4. May 2021
  5. Arrow Meets Hotelling: Modeling Spatial Innovation

Arrow Meets Hotelling: Modeling Spatial Innovation

  • Steven Callander
  • Nicolas Lambert
  • Niko Matouschek
AEA Papers and Proceedings
vol. 111, May 2021
(pp. 538-43)
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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