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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 ()

No 8783, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We first estimate a dynamic game for the global automobile industry and then compute a Markov Perfect equilibrium to study the equilibrium relationship between market structure and innovation. The key state variable in the model is the efficiency level of each firm and the market structure is characterized by the vector of efficiency levels across all firms. Efficiency is estimated to be stochastically increasing in the dynamic control--innovation--which is proxied by patenting behavior. Equilibrium innovation is a function of all state variables in the industry and the cost of R&D which includes a privately observed cost shock. We find that it exhibits the following patterns: 1) innovation by the industry leader is decreasing in the efficiency of other firms; 2) innovation is decreasing in the efficiency dispersion; 3) innovation is more concentrated that efficiency; 4) innovation is declining in the number of active firms; 5) the innovation gap between the leader and other firms increases with competition.

Keywords: Competition; Dynamic game; Schumpeter (search for similar items in EconPapers)
JEL-codes: C73 L13 L62 O31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-cse, nep-ino and nep-tid
Date: 2012-01
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Related works:
Journal Article: The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry (2016) 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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