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Estimating the Innovator's Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry, 1981-1998

69 Pages Posted: 1 Jan 2011 Last revised: 2 Dec 2015

Mitsuru Igami

Yale University - Department of Economics ; Yale University - Cowles Foundation

Date Written: October 14, 2015

Abstract

This paper studies strategic industry dynamics of creative destruction in which firms and technologies experience turnover. Theories predict cannibalization between existing and new products delays incumbents’ innovation, whereas preemptive motives accelerate it. 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, cannibalization makes incumbents reluctant to innovate, which can explain at least 57% 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.

Keywords: Creative Destruction, Dynamic Oligopoly, Innovation, Market Structure, Structural Estimation

JEL Classification: L13, O31

Suggested Citation

Igami, Mitsuru, Estimating the Innovator's Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry, 1981-1998 (October 14, 2015). Journal of Political Economy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1733174 or http://dx.doi.org/10.2139/ssrn.1733174

Mitsuru Igami (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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