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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 Hashmi

    (National University of Singapore)

Abstract

We 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 equilibrium innovation 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 than 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 Hashmi, 2012. "The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry," 2012 Meeting Papers 356, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:356
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. REYNAERT, Mathias, 2014. "Abatement strategies and the cost of environmental regulation: Emission standards on the European car market," Working Papers 2014025, University of Antwerp, Faculty of Applied Economics.
    6. 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.

    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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