By Charles K. Rowley
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Data, suggested that there was a negative correlation between rate of innovation and size of firm, with medium-sized firms performing markedly better than the largest firms in petroleum, coal and steel. Scherer  analysed the patent behaviour of a sample of 448 firms selected from the Fortune list of the 500 largest industrial corporations in 1955, and concluded that 'the evidence does not support the hypothesis that corporate bigness is especially favourable to high inventive output'. These results are both consistent with the view that X-inefficiency tends to outweigh scale economies in the innovative activity of large firms.
Incentives to invent under competition and monopoly size of the rectangle c'puv. This results in a price for the product of the competitive industry equal to p. Arrow defined P' =c'puv. Thus an inventor selling to the competitive industry would invest in inventing as long as the cost of the invention to him was less than P'. By contrast, in the monopoly case Arrow set the price at w to maintain that rate of output for which c=MR. The profit, P, is given by the rectangle cwxy. Following the invention, units costs would fall from c to c' and the new profitmaximising price would be p, yielding a new profit rectangle equal to P'.
Has made the modern industry of a few large firms an almost perfect instrument for inducing technical change. It is admirably equipped for financing technical development. Its organisation provides strong 40 incentives for undertaking development and putting it into effect. () This view is justified by reference in part to scale economies which are assumed to exist in the inventive and innovative processes, in part to the greater ability of monopolistic than of competitive firms in appropriating the fruits of their labours, and in part to the more efficient response of monopolistic firms to an environment characterised by risk and uncertainty.