economics

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If all the assumption of perfect competition hold, why would firms in such an industry
have little incentive to carry out technological change or much research and development? What conditions would encourage research and development in competitive industries?

  • economics -

    In a perfect competition there is little or no incentive to do research and development (R&D). This is because in a perfect competition the firms are merely price takers and not price setters. No matter how much R&D they do, they can still not set the price. So they end up earning zero economic profits. Since they cannot earn any positive profits in the long run, there is no incentive to do R&D. There are a number of ways R&D can be encouraged in competitive industries: A firm needs to make sure that the R&D makes its products different from the competition. If the clients perceive the products as different, then the firm has the ability to charge a premium and earn some profits. In addition, the government can also provide some sort of subsidies or incentives for companies to start R&D. These incentives or subsidies will ensure that the firm recover its R&D costs and earn some profits.

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