Competition and Innovation Revisited: A Project-Level View

Jon A Garfinkel and Mosab Hammoudeh

The Review of Financial Studies, 2025, vol. 38, issue 9, 2652-2717

Abstract: We offer new evidence on the relationship between competition and innovation that overcomes two measurement difficulties compromising the extant literature: aggregation at either firm level (or higher) of innovative activity, and the mediating influence of distance-to-technological-frontier. FDA awards of Breakthrough Therapy Designations (BTDs) on specific drugs, instrument stochastic unleveling of therapeutic (ie, product) markets. Rivals’ innovative responses generally show an inverted-U pattern in ex ante competitiveness of the shocked market. However, the shape of the relation changes with distance to technological frontier in that market, proxied by whether the rival project uses one of the technologies embedded in the BTD-awarded drug.

Date: 2025
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