How Does Price Competition Affect Innovation? Evidence from US Antitrust Cases

34 Pages Posted: 3 Feb 2020 Last revised: 19 Oct 2021

See all articles by Hyo Kang

Hyo Kang

Marshall School of Business, University of Southern California

Date Written: October 10, 2021

Abstract

This paper examines how price competition in the product market affects the intensity and breadth of innovation. I assemble a unique data set comprising all 461 prosecuted collusion cases in the United States from 1975 through 2016, where I match 1,818 collusive firms to firm-level data on innovation. Empirical results from a difference-in-differences methodology show a negative causal relationship between price competition and innovation. When collusion suppressed price competition, colluded firms increased patent filings by 20.5 percent and top-quality patents by 16 percent. A significant portion of these patents are attributable to fundamental innovation activities since innovation inputs—R&D investment and the number of unique patenting inventors—increased in tandem by 15.2 percent and 22.9 percent, respectively. Furthermore, firms broadened their scope of innovation by exploring new technological areas; the number of patented technology classes increased by 11.9 percent. When competition was restored by collusion breakup, the increased and broadened innovation activities reverted to their previous levels. The effects were greater for collusion that was stronger and in fast-growing industries. I shed light on market profitability and firm financial constraints as key economic mechanisms driving 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

Suggested Citation

Kang, Hyo, How Does Price Competition Affect Innovation? Evidence from US Antitrust Cases (October 10, 2021). USC Marshall School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3516974 or http://dx.doi.org/10.2139/ssrn.3516974

Hyo Kang (Contact Author)

Marshall School of Business, University of Southern California ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

HOME PAGE: http://hyokang.com

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