Asymmetric Regulation and Incentives for Innovation

Under asymmetric regulation, different firms in the same industry are subjected to different levels of regulatory restraint. We analyze the nature of innovation rivalry in such an industry, emphasizing that a rival may be able to inexpensively imitate an innovator's successful new technology. Although asymmetric regulation may slow the industry-wide pace of innovation, it does not necessarily do so. In fact, by weakening the regulated incumbent's incentive to imitate, regulation may make an unregulated entrant's innovation profitable, thereby accelerating innovation. Conversely, giving the regulated firm stronger incentives may backfire by producing either excessive or insufficient innovation; these negative outcomes are more likely the greater the cost-reducing potential offered by the new technology.