The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry

41 Pages Posted: 14 Jan 2012  

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 3 versions of this paper

Date Written: January 1, 2012

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: innovation by the industry leader is decreasing in the efficiency of other firms; innovation is decreasing in the efficiency dispersion; innovation is more concentrated that efficiency; innovation is declining in the number of active firms; the innovation gap between the leader and other firms increases with competition.

Keywords: competition, innovation, dynamic game, Schumpeter

JEL Classification: C73, L13, L62, O31

Suggested Citation

Hashmi, Aamir Rafique and Van Biesebroeck, Johannes, The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry (January 1, 2012). Available at SSRN: https://ssrn.com/abstract=1984567 or http://dx.doi.org/10.2139/ssrn.1984567

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

Paper statistics

Downloads
159
Rank
64,607
Abstract Views
967