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Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry

47 Pages Posted: 10 May 2010 Last revised: 11 Aug 2010

Aamir Rafique Hashmi

University of Calgary - Department of Economics; University of Calgary

Johannes Van Biesebroeck

K.U.Leuven; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2010

Abstract

We study the relationship between market structure and innovation in the global automobile industry from 1982 to 2004 using the dynamic industry framework of Ericson and Pakes (1995). Firms optimally choose a continuous level of innovation in a strategic and forward-looking manner, while anticipating the possibility of future mergers. We show that our estimated model predicts the data well and that changes in the modeling assumptions have a predictable effect on the key dynamic parameter -- the cost of innovation. In terms of the relationship between market structure and innovation, we find that: (1) At the firm level, there is a weakly positive relationship between a firm's price-cost margin and its innovation intensity; (2) There is no relationship between competition and innovation at the industry level in the steady state. As the industry goes through a consolidation phase, the relationship is negative if competition is measured by the inverse of markups and positive if it is measured by the inverse of concentration; (3) A key determinant of a firm's innovation intensity is its relative position in the industry in terms of knowledge stock.

Suggested Citation

Hashmi, Aamir Rafique and Van Biesebroeck, Johannes, Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry (May 2010). NBER Working Paper No. w15959. Available at SSRN: https://ssrn.com/abstract=1601710

Aamir Rafique Hashmi (Contact Author)

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

University of Calgary ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://aamirhashmi.com

Johannes Van Biesebroeck

K.U.Leuven ( email )

Naamsestraat 69
B-3000 Leuven
Belgium
+3216326793 (Phone)
+3216326796 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/public/N07057/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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