Does AMD Spur Intel to Innovate More?

Abstract

We estimate an equilibrium model of dynamic oligopoly with durable goods and endogenous innovation to examine the effect of competition on innovation in the PC microprocessor industry. Firms make dynamic pricing and investment decisions while consumers make dynamic upgrade decisions, anticipating product improvements and price declines. Consistent with Schumpeter, we find the rate of innovation in product quality would be 4.2 percent higher without AMD present, though higher prices reduce consumer surplus by $12 billion per year. Comparative statics illustrate the role of product durability and provide implications of the model for other industries.

Keywords: competition and innovation, dynamic oligopoly, durable goods, estimation of dynamic games, microprocessors

JEL Classification: C73, L11, L13, L40, L63