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The relationship between market structure and innovation in industry equilibrium: a case study of the global automobile industry

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  • Aamir Rafique HASHMI
  • Johannes VAN BIESEBROECK

Abstract

We first estimate a dynamic game for the global automobile industry and then compute a Markov Perfect equilibrium to study the equilibrium relationship between market structure and innovation. The key state variable in the model is the efficiency level of each firm and the market structure is characterized by the vector of efficiency levels across all firms. Efficiency is estimated to be stochastically increasing in the dynamic control-innovation-which is proxied by patenting behavior. Equilibrium innovation is a function of all state variables in the industry and the cost of R&D which includes a privately observed cost shock. We find that it exhibits the following patterns: 1) innovation by the industry leader is decreasing in the efficiency of other firms; 2) innovation is decreasing in the efficiency dispersion; 3) innovation is more concentrated that efficiency; 4) innovation is declining in the number of active firms; 5) the innovation gap between the leader and other firms increases with competition.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces12.01.

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Date of creation: Jan 2012
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Handle: RePEc:ete:ceswps:ces12.01

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Cited by:
  1. Adam Copeland & Adam Hale Shapiro, 2010. "The Impact of Competition on Technology Adoption: An Apples-to-PCs Analysis," BEA Working Papers 0063, Bureau of Economic Analysis.
  2. Michael Peneder & Martin Wörter, 2013. "Competition, R&D and Innovation: Testing the Inverted-U in a Simultaneous System," WIFO Working Papers 448, WIFO.
  3. Johannes Van Biesebroeck, 2010. "Bidding for Investment Projects: Smart Public Policy or Corporate Welfare?," Canadian Public Policy, University of Toronto Press, vol. 36(s1), pages 31-48, April.
  4. Aamir Rafique Hashmi, 2011. "Competition and Innovation: The Inverted-U Relationship Revisited," Departmental Working Papers wp1101, National University of Singapore, Department of Economics.
  5. Victor Aguirregabiria & Junichi Suzuki, 2013. "Identification and Counterfactuals in Dynamic Models of Market Entry and Exit," Working Papers tecipa-475, University of Toronto, Department of Economics.
  6. Daiya Isogawa & Hiroshi Ohashi, 2013. "Quantitative Policy Analysis of Innovation Activities: Application to Dynamic Structural Estimation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(2), pages 257-286, March.
  7. Aguirregabiria, Victor & Nevo, Aviv, 2010. "Recent developments in empirical IO: dynamic demand and dynamic games," MPRA Paper 27814, University Library of Munich, Germany.
  8. Adam Copeland & Adam Hale Shapiro, 2013. "Price setting in an innovative market," Working Paper Series 2013-04, Federal Reserve Bank of San Francisco.

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