This paper studies the innovation dynamics of an oligopolistic in- dustry. The
firms compete not only in the output market but also by engaging in
productivity enhancing innovations to reduce labor costs. Rent sharing may
generate productivity dependent wage differentials. Productivity growth
creates intertemporal spill–over effects, which af- fect the incentives for
innovation at subsequent dates. Over time the industry equilibrium approaches
a steady state. The paper character- izes the evolution of the industry’s
innovation behavior and its market structure on the adjustment path.