Administered prices and product innovation: Evidence from the wheelchair industry

The literature on innovation ecosystems emphasizes the relationship between regulation and innovation rates. However, the innovation strategies of new and incumbent firms differ, and regulations may affect them differently. We focus on administered prices, a widespread form of price regulation, and argue that removing them will have a positive effect on product innovation and new firms' survival. Removing administered prices reduces the costs of product innovation by eliminating approval uncertainty and delays, and enabling the emergence of new market segments. This cost reduction helps new firms more than incumbent ones since new firms have fewer slack resources and tend to rely more on innovation. We test our hypotheses using a DiD approach and original data on powered wheelchair firms over the period 2006–2015. We find only limited suggestive evidence that removing administered prices is associated with a positive effect on product innovation. However, we do find a significant increase in the ratio of new firms to total firms when administered prices are removed. We contribute to our understanding of the contextual effects of regulation on innovation and its consequences on industry dynamics. Our results have important practical and policy implications, as they help unpack the incentives and strategic choices faced by different firms in regulated industries.