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The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry

Aamir Hashmi () and Johannes Van Biesebroeck ()

The Review of Economics and Statistics, 2016, vol. 98, issue 1, 192-208

Abstract: We specify and estimate a dynamic game to study the equilibrium relationship between market structure and innovation in the automobile industry. The quality of each firm’s product for the average consumer, the key state variable, is modeled as stochastically increasing in innovation, the dynamic control, which is proxied by patent applications. Equilibrium innovation is a function of market structure, the vector of quality levels of all active firms, and the cost of R&D. Our main findings are as follows: (a) optimal innovation has an inverted-U shape in own quality; (b) holding own quality constant, innovation is declining in average rival quality but increasing in quality dispersion; and (c) following entry, each incumbent’s innovation declines, but aggregate innovation increases in most market structures. These findings are broadly consistent with the Schumpeterian hypothesis that market power leads to more innovation.

Keywords: Competition; Innovation; Dynamic game; Schumpeter (search for similar items in EconPapers)
JEL-codes: C73 L13 L62 O31 (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry (2012) Downloads
Working Paper: The relationship between market structure and innovation in industry equilibrium: a case study of the global automobile industry (2012) Downloads
Working Paper: The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry (2012) Downloads
Working Paper: Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry (2010) Downloads
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The Review of Economics and Statistics is currently edited by Amitabh Chandra, Olivier Coibion, Bryan S. Graham, Shachar Kariv, Amit K. Khandelwal, Asim Ijaz Khwaja, Brigitte C. Madrian and Rohini Pande

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