Question

Please identify and outline which market models make the most of research and development. Which ones also don't use R&D? My understanding is Monopoly wouldn't need to use R&D.

Answer 1

Market Models Making Most Use of R&D

If the firm is in a monopolistically competitive market, then it will probably have to spend some money for R&D, not only to develop new products but also to develop more cost-be effective ways of producing the product. The monopolistic competition market’s firms sell differentiated products so they have a strong incentive to engage in product development. This incentive is to make their product different from these produced by competitors, because newly produced goods may create monopoly power and thus economic profit will increase. However due to easy entry and exit, the innovation is easily be adopted by competitors

Likewise for a firm in an oligopoly. Although firms in an oligopoly have less competition, they still can increase profits by developing new products and lowering their cost of production. Large volume of sales of oligopolists enables them to spread the cost of R&D equipment over large output.  Also barriers to entry helps them to enjoy the benefits of innovation.

Market Models Making Less Use of R&D

Firms in competitive markets, invest little in R&D, since they are selling a commodity product, which is often a natural resource product, such as agricultural products or mineral resources. Firms in Competitive markets sell homogeneous products. The expected return firm R&D process may be low or even negative because entry is extremely easy the profit from innovation can quickly disappear if the new firms that entered this kind of market structure are using the same new, innovated products and product technology. Also Competitive Firms earn only normal profits in long run which makes it less motivating for them to invest in R & D.

A monopoly will also spend less on R&D, since it is not under any competitive pressures, although most monopolies must do some R&D, since evolving technology eventually erodes their market power. Lack of Competitive reduces the incentive of Monopoly to spend money on R & D.