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R&D Rivalry in the U.S. Automobile Industry: A Simultaneous Equation Model Approach to Bain's Hypothesis

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  • Lall B. Ramrattan

Abstract

This paper investigates rivalry in R&D expenditures for firms within the U. S. Automobile industry. It attempts to falsify Bain's paradigm that firms in that industry collude in price, and compete primarily in advertising and secondarily in R&D expenditures. We start with a single equation model of an earlier specification that falsified R&D rivalry for the auto industry, using a smaller sample size. The result also was insignificant, lending credence to Bain's idea that a more concerted effort is needed to ascertain R&D rivalry. To accommodate Bain's hypothesis, we embedded the R&D equation within a system of equations framework, where interactions between advertising, dividend, investment, and finance are co-determined. The system model gained efficiency through explicit specifications for technological and marketing constraints. The results corroborate Bain's hypotheses that R&D rivalry is present only when R&D expenditure is foiled with advertising and other financial ratios.

Suggested Citation

  • Lall B. Ramrattan, 1998. "R&D Rivalry in the U.S. Automobile Industry: A Simultaneous Equation Model Approach to Bain's Hypothesis," The American Economist, Sage Publications, vol. 42(1), pages 42-55, March.
    • Handle: RePEc:sae:amerec:v:42:y:1998:i:1:p:42-55
    DOI: 10.1177/056943459804200104
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    References listed on IDEAS

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