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

40 Pages Posted: 22 Jul 2013 Last revised: 13 Aug 2014

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 9, 2014

Abstract

We specify and estimate a dynamic game to study the equilibrium relationship between market structure and innovation in the automobile industry. The quality of each firm's product for the average consumer, the key state variable, is modeled as stochastically increasing in innovation, the dynamic control, which is proxied by patent applications. Equilibrium innovation is a function of market structure, the vector of quality levels of all active firms, and the cost of R&D. Our main findings are as follows: (i) optimal innovation has an inverted-U shape in own-quality; (ii) holding own quality constant, innovation is declining in average rival quality, but increasing in quality dispersion; (iii) following entry, each incumbent's innovation declines, but aggregate innovation increases in most market structures. These findings are broadly consistent with the Schumpeterian hypothesis that market power leads to more innovation.

Keywords: Competition, Innovation, Dynamic Games, 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 9, 2014). Review of Economics and Statistics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2296781 or http://dx.doi.org/10.2139/ssrn.2296781

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
206
Rank
65,259
Abstract Views
986