ABSTRACT
The central concern of the standard neoclassical theory of the firm is with the choice of profit-maximizing production processes and quantities of inputs and outputs under different assumptions of market structure, time-scale, behavioural perceptions, quality of information, etc. For our purposes the theory needs extending to allow for research inputs and a change in the technology set. Considerable work in building up such a generalized theory has been done recently by a number of authors. This work has been much inspired by Schumpeter’s (1942) ideas about the central role of innovation in modem capitalist economies and the roles of the entrepreneur and market structure in the innovation process. Business history provides strong evidence in support of the major importance of ‘entrepreneurial talent’. However, for economics theorists this concept is elusive, difficult to define, and difficult to measure independently, i.e. in ways other than in terms of economic results. The academic literature has therefore focused on Schumpeter’s argument that seller concentration enhances R&D and innovation. According to this argument, a large-scale monopoly firm is to be preferred to many small-scale competitive firms on two grounds. First, the ‘monopoly firm’ will have greater demand for innovation because its large size increases the ability to profit from any innovation. Second, the monopoly firm will generate a greater supply of innovations because ‘there are advantages which, though not strictly unattainable on the competitive level of enterprise, are as a matter of fact secured only on the monopoly level’ (Schumpeter 1942: 101). Fisher and Temin (1973, 1979) interpret this to mean one or all of the following: (i) a larger R&D staff can operate more efficiently than a small one (because, for instance, it allows room for more specialized personnel); (ii) an R&D staff of a given size operates more efficiently in larger firms (it allows room for more diversified activities, lowering the risk of producing knowledge it cannot use); (iii) larger firms
Market structure, rivalry, and innovation
can buy more R&D inputs at a given expenditure (e.g. they can borrow finance at less Cost).
