This paper examines the relationship between market structure and innovation, analyzing how competition affects firms' incentives to invest in research and development (R&D). The study considers both theoretical and empirical evidence, showing that as industry concentration increases, R&D investment initially rises but eventually declines. The analysis highlights the trade-off between competition and innovation, where intense competition reduces the expected returns on innovation, while monopolistic conditions allow firms to capture all gains from successful innovations. The paper develops a model where firms face uncertainty about the timing of innovation and the actions of competitors. It shows that in a competitive market with many firms, each firm's investment decisions are interdependent, and the overall level of innovation may decrease as the number of firms increases. The model also considers the impact of competition on the expected time for an innovation to be introduced, showing that more competition can lead to faster innovation but may not always be socially optimal. The paper further explores the implications of competitive entry on innovation. It argues that in markets with diminishing returns to scale, atomistic competition (many small firms) is the most efficient, as it leads to the optimal level of innovation. However, in markets with initial increasing returns, excessive competition can lead to over-investment by firms, as they do not account for the parallel nature of their efforts. This results in inefficiencies and excess capacity in R&D. The study also discusses the role of market structure in determining social welfare, suggesting that public authorities could improve outcomes by regulating entry and R&D investments through mechanisms such as licensing fees and finite patent life. The paper concludes that while more competition may lead to faster innovation, it is not always socially desirable, and the optimal market structure depends on the characteristics of the R&D technology.This paper examines the relationship between market structure and innovation, analyzing how competition affects firms' incentives to invest in research and development (R&D). The study considers both theoretical and empirical evidence, showing that as industry concentration increases, R&D investment initially rises but eventually declines. The analysis highlights the trade-off between competition and innovation, where intense competition reduces the expected returns on innovation, while monopolistic conditions allow firms to capture all gains from successful innovations. The paper develops a model where firms face uncertainty about the timing of innovation and the actions of competitors. It shows that in a competitive market with many firms, each firm's investment decisions are interdependent, and the overall level of innovation may decrease as the number of firms increases. The model also considers the impact of competition on the expected time for an innovation to be introduced, showing that more competition can lead to faster innovation but may not always be socially optimal. The paper further explores the implications of competitive entry on innovation. It argues that in markets with diminishing returns to scale, atomistic competition (many small firms) is the most efficient, as it leads to the optimal level of innovation. However, in markets with initial increasing returns, excessive competition can lead to over-investment by firms, as they do not account for the parallel nature of their efforts. This results in inefficiencies and excess capacity in R&D. The study also discusses the role of market structure in determining social welfare, suggesting that public authorities could improve outcomes by regulating entry and R&D investments through mechanisms such as licensing fees and finite patent life. The paper concludes that while more competition may lead to faster innovation, it is not always socially desirable, and the optimal market structure depends on the characteristics of the R&D technology.