> My question is is better for innovation if two companies have equal market share or if one has a smaller market share?

If that's your question, then the answer is obvious, isn't it? The higher the potential reward, the more motivation to innovate. If you only control 1% of the market, innovating might easily mean a 1000% growth of your company; but if you already own half, the best you can possibly do is double that. The upside just isn't there to justify big, risky plays.

That said, there is always a desire to grow, even if not by as much, so there is still incentive to not become stagnant and to continue making improvements to your products, even if marginal.