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Introduction to Modern Economic Growth
for innovation. See, for example, Scotchmer (2005). This perspective has recently
been criticized by Boldrin and Levine (2003).
The idea of creative destruction was also originally developed by Schumpeter.
Models of creative destruction in the industrial organization literature include Reinganum (1983, 1985). Similar models in the growth literature are developed in Aghion
and Howitt (1992, 1998).
Chamberlin (1933) is the classic reference on monopolistic competition. The
Dixit-Stiglitz model is developed in Dixit and Stiglitz (1977) and is also closely
related to Spence (1976). This model was first used for an analysis of R&D in
Dasgupta and Stiglitz (1979). Tirole (1990, Chapter 7) discusses the Dixit-StiglitzSpence model and also other models of product innovation, including the Salop
model, due to Salop (1979), which is presented in Exercise 12.14.
An excellent general discussion of issues of innovation and the importance of
market size and profit incentives is provided in Schmookler (1966). Recent evidence
on the effect of market size and profit incentives on innovation is discussed in Popp
(2002), Finkelstein (2003) and Acemoglu and Linn (2004).
Mokyr (1990) contains an excellent history of innovation. Freeman (1982) also
provides a survey of the qualitative literature on innovation and discusses the different types of innovations.
In this chapter and the rest of this part of the book, we will deal with monopolistic environments, where the appropriate equilibrium concept is not the competitive
equilibrium, but one that incorporates game-theoretic interactions. Throughout the
games we will study in this book will have complete information, thus the appropriate notion of equilibrium is the standard Nash equilibrium concept or when the game
is multi-stage or dynamic, it is the subgame perfect Nash equilibrium. In these situations, equilibrium always refers to a Nash equilibrium or a subgame perfect Nash
equilibrium, and we typically do not add the additional “Nash” qualification. We
presume that the reader is familiar with these concepts. A quick introduction to
the necessary game theory is provided in the Appendix of Tirole (1990), and a more
detailed treatment can be found in Fudenberg and Tirole (1994), Myerson (1995)
and Osborne on Rubinstein (1994).
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