Innovation, Theft, and Market Structure

Abstract

Innovation is the source of product differentiation and is protected by intellectual property rights such as patents and trade secrets. This innovation is a target of theft. Naturally, theft decreases incentives for innovation, which harm consumer utility. This paper addresses the link between innovation, theft and market structure. By expanding a simple monopolistic competition model to include innovation and theft, this paper derives the theoretical conclusion that theft of innovation leads to dominance by larger firms in a more concentrated market with ambiguous effects on innovation. Using panel fixed effects models and data from the World Economic Forum’s Global Competitiveness Index, the conclusion about market structure is supported along with the intuitive result that theft decreases innovation. Thus, mitigating theft is important, not only for encouraging innovation, but for preserving a competitive market.