Innovation concentration in knowledge network

This paper studies the increase in innovation concentration levels of U.S. industries over the last two decades. I present a model of imperfectly competitive patent market with heterogeneous firms that generate endogenous variable markups. Theoretically and empirically, the price of a firm’s newly invented knowledge, the profit and survival rate of the innovating firm depends on the market share of this firm’s knowledge stock and the position of industry in the knowledge network. In the process of innovating, firm pays a random fixed cost in each period which together with market share largely determines its decision on whether to innovate into different sectors. I find that firms with larger market share not only invest more in R&D but also enter into more sectors. Since innovating firms could create blueprints for new varieties and manufacture the products that have been invented, I bridge the gap between the product and the R&D markets to document the similar concentration trends between them. I prove that large firms in the product market would charge higher price on their product so that they can charge higher profit which is a part of the value of their knowledge. Lastly, the increasing trend of concentration could decrease consumers’ welfare in the industries with high initial concentration levels.