SUNK COSTS, MARKET-STRUCTURE, AND GROWTH

I present a model of endogenous innovation where firms undertake in-ho use research and development (R&D). The concentration of sales and R&D resources determines the scale and efficiency of R&D operations and r ate of productivity growth. In zero-profit equilibrium, R&D expenditur e is one component of total fixed costs and determines the number of a ctive firms. This feedback generates interdependent pricing, investmen t, and entry/exit decisions. The (jointly determined) rate of growth a nd number of firms supported in general equilibrium define the economy 's balanced growth path. Multiple equilibria exist, and firms' expecta tions about rivalry determine the economy's performance.