Schumpeterian competition in experimental markets

We report on a series of laboratory experiments that capture key elements of research and development (R&D) rivalry. The experimental environment has a small number of sellers who compete in terms of pricing and production decisions and in terms of cost-reducing R&D. Rewards for innovation depend on the profitability of product market competition. The experiments capture a kind of dynamic, Schumpeterian competition. There is a sharp contrast in experimental results between monopolies and four-seller (competitive) markets. Aggregate R&D is higher under competition than under monopoly and prices follow marginal cost reductions much more quickly under competition than under monopoly. The paper examines market performance in the experiments and the sources of market performance problems.