The Review of Austrian Economics, 16:2/3, 183–204, 2003.
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Innovation and Competition: The Role of Finance
Constraints in a Duopoly Case
University of Rome ‘La Sapienza’
University of Nice Sophia Antipolis and Institut Universitaire de France
IDEFI-CNRS Sophia Antipolis
Abstract. In this paper we analyse the role of ﬁnancial resources in a process of competition interpreted as a
continuous restructuring of productive capacities. Financial constraints appear an essential means of co-ordination.
Co-ordination with the environment where this process of restructuring takes place for the process itself to be
viable and co-ordination between ﬁrms for the survival of competition.
Key Words: competition, co-ordination, ﬁnance, innovation
JEL classiﬁcation: L11, O31.
In this paper we intend to explore the nature of the relation between competition and
innovation—which is the most effective way to acquire a competitive advantage on the
market—and to stress the particular trade-off that characterizes this relation.
In particular, we will show, with reference to a very simple duopoly market, that incentives
exist which conduce ﬁrms to choose strategies that make it possible to take advantage of
potential increasing returns of innovation as determined by the cost reductions associated
with a continuous restructuring of productive capacities.
In this perspective, we shall contrast the view of competition as a process with the
prevailing view of competition as an equilibrium state characterized by an atomistic or
oligopolistic market structure. Viewed as a process, competition has very little to do with
the number of ﬁrms which compete on the market. It appears in fact as the co-ordination
mechanism by which potential returns are actually transformed into monetary gains to
the beneﬁt of ﬁrms, workers and consumers; and, as such, it can be adequately analyzed
irrespective of the number of ﬁrms involved in this process.
Co-ordination is required to take care of the structural effects which innovation implies.
However, it would be a mistake to focus directly on the new productive capacity that
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