Working Paper: NBER ID: w15959
Authors: Aamir Rafique Hashmi; Johannes Van Biesebroeck
Abstract: 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.
Keywords: Market Structure; Innovation; Automobile Industry; Dynamic Analysis
JEL Codes: C73; L13; L62; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm's price-cost margin (L11) | innovation intensity (O31) |
| competition (inverse of markups) (D43) | innovation (consolidation phase) (O35) |
| competition (inverse of concentration) (L49) | innovation (consolidation phase) (O35) |
| relative position in industry regarding knowledge stock (D80) | innovation intensity (O31) |