Managerial Economics

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

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  1. R+D is, in general, expensive and the returns are very uncertain. One purpose of R+D is to lower production costs. However, knowledge is very difficult to contain, despite the best patent laws. So, it is difficult for a firm to capture the total economic benefits from R+D. That is, a firm could spend mucho bucks on R+D, make a big discovery, and see the knowledge of their discovery picked up by other firms.

    To encourage R+D in competitive industries, one could have even stronger patent laws. Or, firms could get together and pool resources (and risks)

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