Which of the following statements is correct? Competition dissipates some of the

Question

Which of the following statements is correct?

Competition dissipates some of the profit from innovation and thus reduces incentives to innovate. This dissipation effect is part of the rationale behind the patent system, which intentionally restricts competition to create incentive for firms to innovate.

Firms gains less incremental profit and thus have less incentive to innovate if the new product replaces an existing product already making profit than if the firm is a new entrant in the market. This replacement effect may lead to turnover in markets and innovation by new firms.

The dissipation effect may counteract this replacement effect, leading old firms to be more innovative.  

All of the above.

Competition dissipates some of the profit from innovation and thus reduces incentives to innovate. This dissipation effect is part of the rationale behind the patent system, which intentionally restricts competition to create incentive for firms to innovate.

Firms gains less incremental profit and thus have less incentive to innovate if the new product replaces an existing product already making profit than if the firm is a new entrant in the market. This replacement effect may lead to turnover in markets and innovation by new firms.

The dissipation effect may counteract this replacement effect, leading old firms to be more innovative.  

All of the above.

Explanation / Answer

All of the three arguments are correct as they are straight quotations from the text. The first two are the definitinons of dissipation and replacment effect and the third stems from the fact that new firms are not always more innovative than existing firms.

The correct option is D.

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