Of all the benefits of a market economy, innovation is likely the greatest. It encourages efficiency, raises our standard of living, and disrupts older, established practices. The basic justification for intellectual property is that because competition is fierce, we need to incentivize creators to make large, up-front investments in innovations with the promise of temporary monopoly rents.
At the same time, the desire to be more efficient or offer a better product than one’s competitors can obviously be a spur to innovation. This has led many to hypothesize that there is an “inverted U” relationship between competition intensity and innovation. Essentially, low levels of competition (e.g. monopoly) discourage innovation due to a lack of competitors and highly competitive markets make the risks inherent to innovating not worthwhile, leaving a “sweet spot” in the middle.
A new paper by Daniel P. Gross on the ability of competition in logo designs to encourage innovation lends support to this “inverted U relationship”:
Though fundamental to innovation and essential to many industries and occupations, individual creativity has received limited attention as an economic behavior and has historically proven difficult to study. This paper studies the incentive effects of competition on individuals’ creative production. Using a sample of commercial logo design competitions, and a novel, content-based measure of originality, I find that intensifying competition induces agents to produce original, untested ideas over tweaking their earlier work, but heavy competition drives them to stop investing altogether. The results yield lessons for the management of creative workers and for the implementation of competitive procurement mechanisms for innovation.
By using software to identify the similarity between different design entries from the same creator, entrants with designs that are highly rated and far ahead of the pack tend to improve on their designs relatively little, while having close competitors encourages more original ideas, incentivizing competitors to take a high-risk, high-reward strategy. More specifically, “high performers’ tendency to produce original work is greatest when facing roughly 50-50 odds of winning.”
On the other end of the spectrum, if the expected value of making a major change to the design is low relative the effort required to make the change, it makes more sense to “tweak” the design rather than produce an original one. Though falling behind encourages innovators to “bring the ‘wow’ factor,” the probability of “abandonment” (not making any changes in the design but keeping it in the running) increases the further behind a competitor falls.