This paper argues that incentives for innovation change nonlinearly by market structure. Using data from 3-digit NAICS and USPCS in the United States, I find strong evidence of a sinusoidal-shaped relationship by using the sub-sectional robust OLS regression model and the quadratic fitting curve. The results imply that the market structures of strong oligopoly and near perfect competition are optimal in stimulating firms to innovate. Moreover, I find a positive relationship between innovation and sales revenue, and between innovation and the number of establishments through robust OLS regression model, which is consistent with the literature. The key theoretical assumption is that profit after innovation serves as an incentive mechanism, which is supported by the regression model. I re-exam Schumpeter and Arrow’s hypotheses, arguing that rather than conflicting they are both consistent along different stretches of competition.


Joe, Histen


Business Economics


Economic Theory | Industrial Organization


Industrial Organization, Market Structure, Innovation, Concentration, Competition

Publication Date


Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis



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