How Does Competition Affect Innovation? Evidence from U.S. Antitrust Cases

Abstract

This paper examines how market competition affects the intensity and breadth of innovation. I assembled a unique dataset comprising all 461 prosecuted collusion cases in the U.S. from 1975-2016, where I match 1,818 collusive firms to firm-level data on innovation. Empirical results from a difference-in-difference methodology show a negative causal relationship between price competition and innovation. When collusion suppressed price competition, colluding firms increased patent filings by 48% and top-quality patents by 33%. A significant portion of these patents are attributable to fundamental innovation activities as innovation inputs measured by R&D investment and patenting inventors increased in tandem by 18% and 57%, respectively. Furthermore, firms broadened the scope of innovation by exploring new technological areas; the number of patented technology classes increased by 30%. When competition was restored by collusion breakdown, the increased and broadened innovation activities reverted back to previous levels. I shed light on financial constraints and industry growth rate as key economic mechanisms behind the trade-off between price competition and innovation growth.

Keywords: competition, cartel, (intensity and breadth of) innovation, R&D investment

JEL Classification: D40, D43, L41, O31, O32