Industrial Structure and the Nature of Innovative Activity

A substantial portion of the increase in the output of advanced industrial nations is widely judged to have been attributable to technical progress. There is also overwhelming evidence that this progress has not occurred merely in a random manner (see, e.g. Schmookler, 1962}. Yet there is not much in the way of economic theory to explain either its rate or its direction, and particularly little that has a reasonably precise micro-economic foundation.^ This lacuna is important, because a recognition of the importance of technical progress raises serious doubts about the adequacy with which traditional micro-economic models allow one to understand the functioning of modern market economies, and to develop policy prescriptions (e.g. with respect to anti-trust policy). The lacuna is also surprising, for it has become a commonplace, at least since the work of Schumpetcr (1947), that the pace of inventive and innovative activity is related to market structure. Moreover, there must be many who share the Schumpeterian belief that perfect competition is inimical to inventive activity, and that the gains from such activity more than offset the welfare loss arising from production inefficiency associated with market power.^ However, a substantial part of the recent industrial organisation literature would appear to have interpreted tests of the Schumpeterian thesis in a somewhat different manner.^ It is often argued now that industrial concentration and large size spur inventive activity. It is as though concentration is a cause of innovations.^