ECONOMICS, we all recite, deals with allocation of limited resources towards satisfaction of unlimited wants. Resources are typically identified as land, labor, and capital plus a technology that determines their transformation into consumer goods. Disparity between the available goods and services and the desired gives rise to scarcity and the question of what, how, and for whom to produce. The focus then shifts to description and evaluation of alternative resource allocation mechanisms for making the choices. The Pareto criterion, by which an allocation of resources is deemed efficient if any reallocation improving the position of some individual worsens the position of others, is a commonly employed gauge of a mechanism's performance. In the absence of externalities, increasing returns to scale, and uncertainty, a perfectly competitive market system yields a Pareto optimal allocation of resources; this underlies the view that individual self-interest is compatible with society's interest. The further conclusion that Pareto optimality may not be achieved via the market system in the presence of monopoly elements provides an economic rationale for antitrust laws. The objective of a resource allocation mechanism appears to be, according to the analysis described above, to make the best of available resources. The alternative objective of relaxing constraints through expanding the resource base or developing new technology seems to be beyond its scope. Thus, until rather recently, technical advance had been regarded, in the mainstream of economic theory, as unmotivated by the quest for profits and substantially unaffected by resource allocation. Instead, as J. Schmookler observed, technology had been viewed as a parameter like the weather, affecting the outcome of resource allocations but itself unaffected by them [84, 1965]. Evidence that technological progress has significantly contributed to growth in productivity, together with a substantial increase in research and development activity, largely financed by government and carried out by industry (see F. Machlup [51, 1962]), may have spurred reconsideration of this view. Once technical advance is regarded as an economic variable, it is natural to in-

Morton I. Kamien, Nancy L. Schwartz; Cournot Oligopoly With Uncertain Entry12, The Review of Economic Studies, Volume 42, Issue 1, 1 January 1975, Pages 125–131

Introduction, 245. — Model I — the framework, 250. — Model I — rivalry and speed of innovation, 253. — Model II — the framework. 255. — Model II — rivalry and speed of innovation, 256. — Summary and conclusions, 258. — Appendix, 259.

The durabilities of a consumption good produced in a perfectly competitive market or by a monopoly are compared. The analysis is conducted in terms of firm profit maximization in a Cournot industry. Conclusions are based on the properties of the entire optimal path rather than on the steady state alone.

[The choice of development period and consequent introduction time for a single innovation by an expected profit maximizing firm operating under conditions of rivalrous competition is studied. Factors taken into account by the firm are the increasing cost with compression of the development period, the reduction of profit opportunities with prolongation of the development period, and the probability of rival innovation and imitation which affect the potential rewards available to the firm. Comparisons is made with the timing that would be selected in the absence of rivalry. The effects of intense rivalry are also examined.]

The situation in which a seller is aware that his pricing policy will affect the probability of entry of competing suppliers is studied. The seller's optimal policy is developed under the assumption that the entry probability is a non-decreasing function of product and that the objective is present value maximization. It is shown that the optimal pre-entry tends to fall as the discount rate drops, the market growth rate rises, the post-entry profit possibilities decline, or certain non-price barriers to entry fall. ECONOMISTS HAVE LONG known that maximizing immediate profits is often not the optimal strategy for a firm to pursue if its planning horizon extends beyond the present. A policy for achieving the highest overall reward may dictate the sacrifice of some current gain. This point has played a central role in the development of the theory of a The theory deals with determination of the entrypreventing by a supplier of a market when potential entrants exist. The supplier in question may be a firm or a group of (tacitly) cooperating firms. The high short term profits associated with the pursuit of monopoly pricing must be balanced against the loss of long term profits upon entry of additional suppliers attracted by the high price. In an early paper formalizing the problem, Bain [2] defined the price as the highest that the established sellers can set without inducing entry. Modigliani [9] developed a graphical derivation of the limit and analyzed a number of its determinants. Fisher [6] related these results to Cournot's duopoly model. Recent contributors include Pashigian [10] and Dewey [5]. On the other side of the Atlantic, Harrod [7], in an attack on the doctrine of excess capacity, argued that a long-run profit maximizing firm would set to preclude entry. According to Hicks' [8] formalization of Harrod's argument, the firm seeks maximization of a weighted sum of short-run and long-run profits, with the relative weights reflecting the firm's attitudes regarding these periods. It follows from this that the firm may not set at its entry preventing level. Explicit criticism of the limit concept has not been lacking. Williamson [13], while extending the concept of a limit to a limit price-selling cost frontier, suggested that the deterministic framework be modified to a probabilistic one. In proposing a stochastic approach, he noted that the limit theory is highly rigid, with a single point or curve dividing certain entry from no entry. Williamson also observed that the assumed optimality of the limit implied that the firm would be willing to prevent entry at any cost. Stigler [12, p. 227] has pointed out that the attractiveness of entry will depend not only upon the current rate of return to the industry, but also upon the anticipated rate of growth of industry demand. If the latter is large, then the present value of future profits may be sufficiently large

In this paper an attempt is made to give precise expression to the conditions under which a profit maximizing firm with fixed research budget will choose each type of technical change (i.e., neutral and nonneutral). It was found that the optimal choice depends on the initial technology, relative factor prices, and relative costs of acquiring different types of technical change. The preferred technical change need not be exclusively of one sort (e.g., neutral chanige). Once neutral technical change becomes optimal, however, it remains so until there is a change in relative factor prices. On the other hand, adoption of a biased technical change may eventually cause neutral advance to become desired even in the absence of relative factor price changes. Examination of the firm's decision criterion under the assumption that it is a monopsonistic buyer of factors of production, discloses that under identical initial conditions (i.e., relative factor prices and relative costs of alternative forms of technical change) the firm will prefer more biased technical change relative to the situation in which it purchases factors competitively. In particular, the firm will, under these conditions, seek those biased technical changes which economize on the factor whose elasticity of supply is relatively smaller. Finally, it was also discovered that, contrary to previous suppositions, changes in the elasticity of substitution do affect the optimal capital-labor ratio for each factor price combination in all cases but one.