Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry
We study the relationship between market structure and innovation in the global automobile industry from 1982 to 2004 using the dynamic industry framework of Ericson and Pakes (1995). Firms optimally choose a continuous level of innovation in a strategic and forward-looking manner, while anticipating the possibility of future mergers. We show that our estimated model predicts the data well and that changes in the modeling assumptions have a predictable effect on the key dynamic parameter -- the cost of innovation. In terms of the relationship between market structure and innovation, we find that: (1) At the firm level, there is a weakly positive relationship between a firm's price-cost margin and its innovation intensity; (2) There is no relationship between competition and innovation at the industry level in the steady state. As the industry goes through a consolidation phase, the relationship is negative if competition is measured by the inverse of markups and positive if it is measured by the inverse of concentration; (3) A key determinant of a firm's innovation intensity is its relative position in the industry in terms of knowledge stock.
We would like to thank Victor Aguirregabiria, Adam Copeland, Eugenio Miravete, Martin Pesendorfer, Mark Roberts, Aloysius Siow, John Sutton, and numerous seminar participants for their comments. We also thank Bart Van Looy for help with the patent data. Financial support from AUTO21, CFI, and SSHRC is greatly appreciated. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Aamir Rafique Hashmi & Johannes Van Biesebroeck, 2016. "The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry," The Review of Economics and Statistics, MIT Press, vol. 98(1), pages 192-208, March. citation courtesy of