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Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry

  • Johannes Van Biesebroeck

    (University of Toronto)

  • Aamir Hashmi

    (University of Toronto)

Since the global auto industry has seen a lot of consolidation since 1980, mergers are an important ingredient of our model. After estimating the parameters of the model, we simulate the industry forward and study how changing market structure (mainly due to mergers) affects innovative activity at the firm as well as the industry level. Our findings are the following. (1) The effect of market structure on innovation in the global auto industry depends on the initial state of the industry. If the industry is not very concentrated, as it was in 1980, some consolidation may increase the innovative activity. However, if the industry is already concentrated, as in 2005, further consolidation may reduce the innovation incentives. (2) Mergers reduce the value of merging firms though they may increase the aggregate value of the industry. (3) Mergers between big firms eventually reduce consumers’ utility.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 362.

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Date of creation: 2007
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Handle: RePEc:red:sed007:362
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