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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

    (National University of Singapore)

  • Johannes Van Biesebroeck

    (KU Leuven and CEPR)

Abstract

We specify and estimate a dynamic game to study the equilibrium relationship between market structure and innovation in the automobile industry. The quality of each firm’s product for the average consumer, the key state variable, is modeled as stochastically increasing in innovation, the dynamic control, which is proxied by patent applications. Equilibrium innovation is a function of market structure, the vector of quality levels of all active firms, and the cost of R&D. Our main findings are as follows: (a) optimal innovation has an inverted-U shape in own quality; (b) holding own quality constant, innovation is declining in average rival quality but increasing in quality dispersion; and (c) following entry, each incumbent’s innovation declines, but aggregate innovation increases in most market structures. These findings are broadly consistent with the Schumpeterian hypothesis that market power leads to more innovation.

Suggested Citation

  • Aamir Rafique Hashmi & Johannes Van Biesebroeck, 2016. "The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry," The Review of Economics and Statistics, MIT Press, vol. 98(1), pages 192-208, March.
    • Handle: RePEc:tpr:restat:v:98:y:2016:i:1:p:192-208
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    More about this item

    Keywords

    Competition; Innovation; Dynamic game; Schumpeter;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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