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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
  • Johannes VAN BIESEBROECK

Abstract

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.

Suggested Citation

  • Aamir Rafique HASHMI & Johannes VAN BIESEBROECK, 2012. "The relationship between market structure and innovation in industry equilibrium: a case study of the global automobile industry," Working Papers of Department of Economics, Leuven ces12.01, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
  • Handle: RePEc:ete:ceswps:ces12.01
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    Cited by:

    1. Michael Peneder & Martin Woerter, 2014. "Competition, R&D and innovation: testing the inverted-U in a simultaneous system," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 653-687, July.
    2. Noton, Carlos, 2016. "Structural estimation of price adjustment costs in the European car market," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 105-147.
    3. Geurts, Karen & Van Biesebroeck, Johannes, 2016. "Firm creation and post-entry dynamics of de novo entrants," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 59-104.
    4. Aamir Rafique Hashmi, 2013. "Competition and Innovation: The Inverted-U Relationship Revisited," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1653-1668, December.
    5. Victor Aguirregabiria & Junichi Suzuki, 2014. "Identification and counterfactuals in dynamic models of market entry and exit," Quantitative Marketing and Economics (QME), Springer, vol. 12(3), pages 267-304, September.
    6. Aguirregabiria, Victor & Nevo, Aviv, 2010. "Recent developments in empirical IO: dynamic demand and dynamic games," MPRA Paper 27814, University Library of Munich, Germany.
    7. Adam Copeland & Adam Hale Shapiro, 2013. "Price Setting in an Innovative Market," Working Paper Series 2013-04, Federal Reserve Bank of San Francisco.
    8. Johannes Van Biesebroeck, 2010. "Bidding for Investment Projects: Smart Public Policy or Corporate Welfare?," Canadian Public Policy, University of Toronto Press, vol. 36(s1), pages 31-48, April.
    9. Adam Hale Shapiro & Adam Copeland, 2010. "The Impact of Competition on Technology Adoption: An Apples-to-PCs Analysis," 2010 Meeting Papers 181, Society for Economic Dynamics.
    10. Michael L. Polemis & Thanasis Stengos & Nickolaos G. Tzeremes, 2020. "Modeling the effect of competition on US manufacturing sectors’ efficiency: an order-m frontier analysis," Journal of Productivity Analysis, Springer, vol. 54(1), pages 27-41, August.
    11. Zhao, Wei, 2013. "Estimating Dynamic Merger Effciencies with an Application to the 1997 Boeing-McDonnell Douglas Merger," MPRA Paper 63184, University Library of Munich, Germany, revised 11 Sep 2014.
    12. Mathias Reynaert, 2014. "Abatement Strategies and the Cost of Environmental Regulation: Emission Standards on the European Car Market," 2014 Papers pre327, Job Market Papers.
    13. Sun, Xiuli & Li, Haizheng & Ghosal, Vivek, 2020. "Firm-level human capital and innovation: Evidence from China," China Economic Review, Elsevier, vol. 59(C).
    14. Linli Xu & Jorge M. Silva-Risso & Kenneth C. Wilbur, 2018. "Dynamic Quality Ladder Model Predictions in Nonrandom Holdout Samples," Management Science, INFORMS, vol. 64(7), pages 3187-3207, July.
    15. Coublucq Daniel & Ivaldi Marc & McCullough Gerard, 2018. "The Static-Dynamic Efficiency Trade-off in the US Rail Freight Industry: Assessment of an Open Access Policy," Review of Network Economics, De Gruyter, vol. 17(4), pages 267-301, December.
    16. Houngbonon, Georges Vivien & Jeanjean, François, 2016. "What level of competition intensity maximises investment in the wireless industry?," Telecommunications Policy, Elsevier, vol. 40(8), pages 774-790.
    17. Konstantinos Konstantakis & Panayotis G. Michaelides & Theofanis Papageorgiou, 2014. "Sector size, technical change and stability in the USA (1957-2006): a Schumpeterian approach," International Journal of Social Economics, Emerald Group Publishing, vol. 41(10), pages 956-974, October.
    18. Calvano, Emilio & Polo, Michele, 2020. "Market Power, Competition and Innovation in digital markets: a survey," CEPR Discussion Papers 14314, C.E.P.R. Discussion Papers.
    19. Jan De Loecker & Johannes Van Biesebroeck, 2016. "Effect of International Competition on Firm Productivity and Market Power," NBER Working Papers 21994, National Bureau of Economic Research, Inc.
    20. Daiya Isogawa & Hiroshi Ohashi, 2013. "Quantitative Policy Analysis of Innovation Activities: Application to Dynamic Structural Estimation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(2), pages 257-286, March.
    21. Polemis, Michael & Stengos, Thanasis & Tzeremes, Nickolaos, 2018. "Modeling the effect of competition using robust conditional nonparametric frontiers: Evidence from U.S. manufacturing sector," MPRA Paper 89240, University Library of Munich, Germany.
    22. Zionam E. L. Rolim & Rafael R. de Oliveira & H'elio M. de Oliveira, 2019. "Industrial Concentration of the Brazilian Automobile Market and Positioning in the World Market," Papers 1908.09686, arXiv.org.
    23. Polemis, Michael L. & Tzeremes, Nickolaos G., 2019. "Competitive conditions and sectors’ productive efficiency: A conditional non-parametric frontier analysis," European Journal of Operational Research, Elsevier, vol. 276(3), pages 1104-1118.

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    More about this item

    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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