Competition and Innovation Revisited: A Product-Level View
115 Pages Posted: 1 Oct 2020 Last revised: 8 Feb 2022
Date Written: February 8, 2022
We study the effect of competition on firm innovation at the project-level. We instrument shocks to competition in therapeutic areas with the FDA’s breakthrough therapy designation (BTD) event on a therapy, and confirm these events associate with several indicators of competitive shocks. We then show that BTD shocks discourage rivals’ innovation in that therapeutic area on average; but the effect varies with ex-ante competitiveness of the therapeutic area, as well as with the rival’s position (leader vs. follower) in that space. We support Aghion et al. (2005) with direct causal evidence at the corporate-project-level.
Keywords: Competition, Product Markets, Innovation, Peer Effects, Breakthrough, Pharmaceutical Innovation
JEL Classification: L1, O31, O38
Suggested Citation: Suggested Citation