Two alternative ways to an innovative product or process are R&D investment
or imitation of others’ innovation. Here we attempt to model the dynamics of
innovation and imitation in a market with many firms and monopolistic competi-
tion. We adopt an evolutionary approach with costly innovators and free imitators,
where a firm faces the following decision problem: innovate or imitate? These two
routines are sub ject to discrete choice. Fractions of innovators and imitators are
evolving. Firstly we look at innovation as costs reduction. Secondly also as prod-
uct differentiation. If just costs reduction is concerned, innovation and imitation
only affect the supply curve. If also product differentiation arises, the demand side
evolves too. The basic idea is that imitation works better the more innovators are
around. Consequently heterogeneous supply experiences two opposing forces be-
tween innovation and imitation, that take the industry through different dynamic
scenarios. There are conditions where the industry does not converge to a stable
equilibrium, but price and agents’ concentration fluctuate indefinitely. If also de-
mand is affected by innovation, coherence may be lost and the industry presents
chaotic behaviour.