If all the assumptions of perfect competition hold why would

If all the assumptions of perfect competition hold, why would firms in such an industry have little incentive to carry out technological change or much research and development? What conditions would encourage research and development in competitive industries?

Solution

The characteristics of a market where there’s perfect competition include:

A technological change or a research and development undertaking often comes with significant costs. If a firm in a perfectly competitive market environment makes a big investment in a technological change and comes up with an innovative product, other firms will soon follow suit, develop similar products, and restore homogeneity in the market. While the firm that originally invested in the technology change has to put up with all the research and development costs, the other firms just get to copy the idea and reap the benefits. Such a situation thus gives little incentive for firms in a perfectly competitive market to attempt a technological change or carry out much research and development. Strong patent rights, intellectual property rights, and copyright laws can go a long way in encouraging firms in competitive industries to undertake research and development efforts, create innovative products, and exclusively receive the rewards.