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The relationship between market structure and innovation in industry equilibrium: a case study of the global automobile industry

  • Aamir Rafique HASHMI
  • Johannes VAN BIESEBROECK

We first 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 it 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 that 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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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces12.01.

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Date of creation: Jan 2012
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Handle: RePEc:ete:ceswps:ces12.01
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