The Dynamics of Learning and Competition in Schumpeterian Environments

Abstract

In this study, we examine the nature of Schumpeterian competition between entrants and incumbents. We argue that incumbents may respond to the threat of entry by either attacking the entrant or trying to learn from it, and that entrants, in turn, may react by either reciprocating the incumbent’s advances or retreating from it. Putting these competitive choices together, we develop a framework of four distinct potential scenarios of Schumpeterian competition. In particular, we emphasize a scenario we term creative divergence, wherein incumbents try to learn from entrants and build on their technologies, but their investments to do so cause entrants to retreat, resulting in diminishing returns to learning investments by incumbents. Exploratory analyses of the U.S. cardiovascular medical device industry find patterns consistent with the creative divergence scenario, with incumbent knowledge investments helping them to learn from entrants, but these learning benefits being undermined as entrants move away from incumbents.The online appendices are available at https://doi.org/10.1287/orsc.2018.1264 .