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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 Hashmi

    (National University of Singapore)

Abstract

We 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 equilibrium innovation 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 than 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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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 356.

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Date of creation: 2012
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Handle: RePEc:red:sed012:356

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Cited by:
  1. Johannes Van Biesebroeck, 2008. "Bidding for Investment Projects: Smart Public Policy or Corporate Welfare?," Working Papers tecipa-344, University of Toronto, Department of Economics.
  2. Victor Aguirregabiria & Victor Aguirregabiria & Aviv Nevo & Aviv Nevo, 2010. "Recent Developments in Empirical IO: Dynamic Demand and Dynamic Games," Working Papers tecipa-419, University of Toronto, Department of Economics.
  3. Adam Copeland & Adam Hale Shapiro, 2010. "The impact of competition on technology adoption: an apples-to-PCs analysis," Staff Reports 462, Federal Reserve Bank of New York.
  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. Michael Peneder & Martin Woerter, 2014. "Competition, R&D and innovation: testing the inverted-U in a simultaneous system," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 653-687, July.
  6. Adam Copeland & Adam Hale Shapiro, 2013. "Price setting in an innovative market," Working Paper Series 2013-04, Federal Reserve Bank of San Francisco.
  7. 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.
  8. 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.

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