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, using the formation and breakup of price fixing cartels to proxy for competition, or lack thereof. I assembled a unique dataset comprising 461 prosecuted cartel cases in the U.S. from 1975-2016, where I match 1,818 collusive firms to firm-level data on patenting and other measures of innovation. I then use a difference-in-difference methodology, matching colluding firms to various counterfactual firms. Empirical results show a negative causal relationship between competition and innovation in the cartel context. When collusion suppressed market competition, colluding firms increased R&D investment by 12%, patenting by 51%, and top-quality patents by 20%. Furthermore, at the same time, firms broadened their areas of innovation by increasing the number of patented technology fields by 33%. The main finding has a notable strategic implication – that firms shift toward innovation competition when price competition weakens. Further tests suggest that financial constraint (“ability to innovate”) and the industry’s growth rate (“incentive to innovate”) are important 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