Innovation and Competition on a Rugged Technological Landscape

We integrate innovation into Hotelling's classic model of spatial competition. Potential entrants arrive sequentially and choose whether and where to innovate. They can innovate beyond the frontier, expanding the boundary of the market, or within a niche between incumbent products. Product quality is learned only after introduction, and uncertainty increases with novelty. Innovation on a rugged technological landscape is irregular, with frequent changes in direction and cycles between frontier and niche innovation. The ruggedness of the technological landscape itself deters innovation, generating fewer entrants, less product differentiation, narrower markets, and more intense competition than under certainty. (JEL D11, D21, D83, L11, L25, O31)