This paper by Glenn C. Loury explores the relationship between market structure and innovation, focusing on the incentives for firms to invest in research and development (R&D) in competitive and monopolistic markets. The author reviews existing literature that examines the impact of firm size and industry concentration on R&D investments, noting that R&D efforts increase with industry concentration up to a point but decline thereafter. Loury combines the approaches of Scherer and Kamien and Schwartz to develop a model where firms face stochastic technological relationships and market uncertainty. The model assumes that firms maximize expected discounted profits, considering the probability of rival introduction and the time at which the innovation will be ready. The paper derives propositions that show as the number of firms in an industry increases, the equilibrium level of firm investment decreases, and the expected time for innovation to be introduced also decreases. Additionally, the paper discusses the efficiency of market equilibria, arguing that firms tend to over-invest in R&D due to their lack of consideration for the parallel nature of their efforts. The paper concludes that while more competition reduces individual firm investment incentives, it may not be socially desirable. In the case of diminishing returns, atomistic competition is optimal, but with initial scale economies, the optimal market structure involves a finite number of firms. The paper suggests that social welfare can be maximized by limiting entry and firm investments through licensing fees and finite patent life.This paper by Glenn C. Loury explores the relationship between market structure and innovation, focusing on the incentives for firms to invest in research and development (R&D) in competitive and monopolistic markets. The author reviews existing literature that examines the impact of firm size and industry concentration on R&D investments, noting that R&D efforts increase with industry concentration up to a point but decline thereafter. Loury combines the approaches of Scherer and Kamien and Schwartz to develop a model where firms face stochastic technological relationships and market uncertainty. The model assumes that firms maximize expected discounted profits, considering the probability of rival introduction and the time at which the innovation will be ready. The paper derives propositions that show as the number of firms in an industry increases, the equilibrium level of firm investment decreases, and the expected time for innovation to be introduced also decreases. Additionally, the paper discusses the efficiency of market equilibria, arguing that firms tend to over-invest in R&D due to their lack of consideration for the parallel nature of their efforts. The paper concludes that while more competition reduces individual firm investment incentives, it may not be socially desirable. In the case of diminishing returns, atomistic competition is optimal, but with initial scale economies, the optimal market structure involves a finite number of firms. The paper suggests that social welfare can be maximized by limiting entry and firm investments through licensing fees and finite patent life.