WAVES OF CREATIVE DESTRUCTION - FIRM-SPECIFIC LEARNING-BY-DOING AND THE DYNAMICS OF INNOVATION

This paper develops a model of repeated innovation with knowledge spil lovers. The model's novel feature is that firms compete on two dimensi ons: (1) product quality, where one firm's innovation ultimately spill s over to other firms; and (2) distribution costs, where there are no spillovers across firms and where learning-by-doing on the part of inc umbent firms gives them a competitive advantage over would-be entrants . Such firm-specific learning-by-doing has two important consequences: (1) it can in some circumstances dramatically reduce the long-run ave rage level of innovation; (2) it leads to endogeneous bunching, or wav es, in innovative activity.