Economic growth and economic development 579

Introduction to Modern Economic Growth entrants’ incentives to improve over this product and replace the monopolist as the main supplier of the product Despite the appropriability and the replacement effects, the amount of innovation in equilibrium can be excessive, because of another, countervailing force, the business stealing effect, which encourages firms to undertake innovations in order to become the new monopolist and take over (“steal”) the monopoly rents Therefore, whether there is too little or too much innovation in equilibrium depends on the market structure and the parameters of the model This chapter has also introduced the Dixit-Stiglitz-Spence (or for short the DixitStiglitz) model, which will play an important role in the analysis of the next few chapters This model enables a very tractable approach to Chamberlin type of monopolistic competition, where each firm has some monopoly power, but free entry ensures that all firms (or the marginal entrants) make zero profits The DixitStiglitz model is particularly tractable because the markup charged by monopolists is independent of the number of competing firms This makes it an ideal model to study endogenous growth, because it will enable innovation to remain profitable even when the number of products or the number of machines increase continuously 12.7 References and Literature The literature on R&D in industrial organization is vast, and our purpose in this chapter has not been to review this literature, but to highlight the salient features that will be used in the remainder of the book The reader who is interested in this area can start with Tirole (1990, Chapter 10), which contains an excellent discussion of the contrast between private and the social values of innovation It also provides a simple introduction to patent races, which will feature later in the book A more up-to-date reference that surveys the recent developments in the economics of innovation is Scotchmer (2005) The classic reference on the private and social values of innovation is Arrow (1962) Schumpeter (1943) was the first to emphasize the role of monopoly in R&D and innovation The importance of monopoly power for innovation and the indications of the non-rival nature of ideas are discussed in Romer (1990, 1993) and Jones (2006) Most of the industrial organization literature also emphasizes the importance of ex post monopoly power and patent systems in providing incentives 565