Growth, Inter-Industry and Intra-Industry Competition and Welfare

In this paper we introduce strategic interaction between firms in an R&D growth model which captures both the intra-industry competition between firms operating within an industry and the inter-industry competition between firms in different industries. We show that the more substitutable the goods produced within each industry (across industries) are, that is, the more intense the intra-industry (inter-industry) competition, the higher is the growth rate. In the comparison between social optimum and a decentralized economy, it is shown that the market outcome is characterized by inefficiently high entry of firms within each industry and insufficient productivity growth.