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I believe that there is strong evidence that policy materially drives innovation, with anti-trust policy, patent policy, and other R&D policy of foremost importance. I would anticipate that anti-trust policy will not materially change, and that in fact the interpretation of policy in terms of economic efficiency will become ever more sophisticated, favouring innovation enhancing strategies. Patent policy is unlikely to change. The dominant change will come through other R&D policy, particularly the spending on R&D by the federal government. With a period of prolonged recession likely, spending on R&D by government will rise relative to spending on R&D by private firms, and capture the spillovers of this spending, perhaps through increased alliances with universities and government labs, perhaps through private research conducted with federal investment, will become increasingly more important. Obama's campaign included a promise of a $10b green technology investment fund, to be operated along the principals of venture capital. This policy would not only fund research, but would do so in the most effective (to date) method of forcing commercialization. Firms will respond by spinning out green ventures, and by buying up promising green companies. This will be particularly prevalent in the oil industry, as both the supply of oil dwinddles and as oil dependence (because of foreign policy and environmental policy) becomes ever less attractive.
'''Addendum'''
Ziedonis, R.H. (2004), "Don't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms", Management Science. pdf
===Answer A2: Competition, Innovation and Antitrust (Dal Bo)===
Whether the innovation is cheap or not is not first order germane. The important question is the appropriability regime. I will assume that the cheap innovation (making the phone red) is appropriable (i.e. there are no property rights associated with the colour red), and that the battery life innovation is patentable and that strong (perfect) IPR protection exists.
Then the red phone would indicate an introduction of differing qualities that are imitable at some (possibly zero) cost. This gives a Hotelling (1929) or Salop (1979) like model, assuming that customers have some preferences over quality. Perhaps a line from White to Red could indicate the distribution of customer preferences, the cost of innovation could be the cost of entry on the line, and the transport cost could present the lost utility of a customer away from thier ideal colour. We begin the game with two firms situated on White, one of which gets to 'spawn' another firm that locates on Red. The White-only competitor may spawn an entrant or other new entrants may enter the market.
Absent new entry, if there was only one firm at White and one at Red we would expect them to price to compete against each other exactly in the Hotelling model (given these location choices). However, the Bertrand competition at the White end of the line reduces price to marginal cost, and only customer whose valuation of a White above marginal cost can buy from them. This gives the player at Red, potentially at least, the rest of the market without competiting with players at White - the customer whose valuation of White is marginal cost would have to have a valuation of Red greater than or equal to marginal cost for the entire market to be served. However, as the Red player is a monopolist over this area he would rather price above marginal cost and earn positive profits which he does.
As the cost of entry is extremely low, I will assume it to be effectively zero. Then firms will enter and while there are a finite number of firm they locate so that they have space around themselves on the line, charge prices about marginal cost and reap profits above zero. Once an infinite number of firms have entered the line will be saturated all firms will charge marginal cost and earn zero profits.
Given that the battery innovation has perfect property right protection around it (for 20 years) by assumption, we expect the that firm will have a monopoly on it. Thus, if there is no effect between the markets, Bertrand competition will continue for the White phones which will be priced at marginal cost and earn their firms zero profits, and the battery life phones will be monopoly priced and earn monopoly profits. If there is an effect between the markets, that is because of a taste for variety a change in the Battery phone's price will have an effect on not only the demand for Battery phones but also for White phones, then we have a Dixit-Stiglitz (1977) type model, except that we do not have a free entry assumption. With free entry firms would earn zero profits, but with costly entry (i.e. the cost of coming up with a comparable innovation to the Battery innovation), the Battery firm will earn positive profits. However, because of the demand effect, the battery firm will not earn monopoly profits, but something less. With free entry the number of firms will increase but remain finite in this model - firms enter until the customer's taste for variety is satiated. Likewise with costly entry but excess taste for variety we could expect more entry and more positive profits (to cover the cost of entry) until satiation.
Shaked and Sutton (1982) provide an explanation for an observation of a duopolist, in conjunction with both positive profits and zero entry costs. In their model there is price competition, but they provide grounds for an objection to the investigation. In this model the consumers taste for product variation allows two different quality entrants to enter the market, compete on prices, and earn positive profits. The entry of a third firm (if the parameters are as described in their model) would reduce profits to zero for all firms, and reduce welfare - as customers would then only have one choice of product when they have a taste for variety. Thus the grounds would have to that the firms are producing different qualities, and that the higher quality firm is making the greater profit - this would be entire consistent with the model. For different parameters more than two firms could be in the market even and even with a free entry condition could be earning positive profits - in this case the profits should still be quality ordered. Profits here do not indicate anticompetitive behaviour or barriers to entry - they indicate vertical differentiation. In fact zero profits would indicate too much competition, and too little provision of variety.
'''References'''
#'''[[Dixit Stiglitz (1977) - Monopolistic Competition And Optimum Product Diversity |Dixit, A. and J. Stiglitz (1977)]]''', "Monopolistic competition and optimum product diversity", American Economic Review 67, 297-308. [http://www.edegan.com/pdfs/Dixit%20Stiglitz%20(1977)%20-%20Monopolistic%20competition%20and%20optimum%20product%20diversity.pdf pdf] [http://www.edegan.com/repository/Dixit%20Stiglitz%20(1977)%20-%20Class%20Slides.pdf (Class Slides)]
#'''[[Hotelling (1929) - Stability In Competition |Hotelling, H. (1929)]]''', "Stability in competition", Economic Journal 39, 41-57. [http://www.edegan.com/pdfs/Hotelling%20(1929)%20-%20Stability%20in%20competition.pdf pdf]
#'''[[Salop (1979) - Monopolistic Competition With Outside Goods |Salop (1979)]]''', "Monopolistic competition with outside goods", Bell Journal of Economics 10, 141-156. [http://www.edegan.com/pdfs/Salop%20(1979)%20-%20Monopolistic%20competition%20with%20outside%20goods.pdf pdf]
#'''[[Shaked Sutton (1982) - Relaxing Price Competition Through Product Differentiation |Shaked, A. and J. Sutton (1982)]]''', "Relaxing price competition through product differentiation", Review of Economic Studies 49, 3-13. [http://www.edegan.com/pdfs/Shaked%20Sutton%20(1982)%20-%20Relaxing%20price%20competition%20through%20product%20differentiation.pdf pdf]
