Estimating the Innovator's Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry
Yale University, Faculty of Arts & Sciences, Department of Economics
August 20, 2014
This paper studies strategic industry dynamics of creative destruction in which firms and technologies turn over. Theories predict cannibalization between existing and new products delays incumbents’ innovation, whereas preemptive motives accelerate it, and incumbents’ cost (dis)advantage relative to that of entrants would further reinforce these tendencies. To empirically assess these three forces, I develop and estimate a dynamic oligopoly model using a unique panel dataset of hard disk drive (HDD) manufacturers (1981-98). The results suggest that despite strong preemptive motives and a substantial cost advantage over entrants, incumbents are reluctant to innovate because of cannibalization, which can explain at least 66% of the incumbent-entrant innovation gap. I then assess hypothetical policy interventions concerning broad patents and license fees, and find the industry’s welfare trajectory difficult to outperform.
Number of Pages in PDF File: 56
Keywords: Creative Destruction, Dynamic Oligopoly, Structural Estimation
JEL Classification: L13, O31
Date posted: January 1, 2011 ; Last revised: August 22, 2014
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