Market Structure and Innovation

41 Pages·2009·0.48 MB·English

Introduction
Model&(static)estimation
(Dynamic)estimation
Application
Conclusions
Market Structure and Innovation: A Dynamic
Analysis of the Global Automobile Industry
Aamir Rafique Hashmi 1 Jo Van Biesebroeck 2
1NationalUniversityofSingapore
2K.U.Leuven,NBER,andCEPR
FTC/Northwestern workshop – Washington, D.C.
November 19, 2009
Hashmi&VanBiesebroeck MarketStructureandInnovation
Introduction
Model&(static)estimation
Motivation
(Dynamic)estimation
Objectives
Application
Conclusions
The Question
What is the relationship between market structure and innovation?
(cid:73) Extensively studied in the literature since Schumpeter (1942)
“— the large-scale establishment or unit of control ... has come to
be the most powerful engine of ... progress and in particular of the
long-run expansion of output...
... perfect competition is not only impossible but also inferior, and
has no title to being set up as a model of ideal efficiency.” [p.106]
(cid:73) “The second most tested set of hypotheses in IO...”
[Aghion and Tirole (QJE, 1994)]
Hashmi&VanBiesebroeck MarketStructureandInnovation
Introduction
Model&(static)estimation
Motivation
(Dynamic)estimation
Objectives
Application
Conclusions
Existing Studies
(cid:73) Older studies are mostly reduced form:
Regress a measure of innovation (e.g. R&D expenditures,
patent count,...) on a measure of market power (e.g.
mark-up, Herfindhal,...)
[surveyed by Kamien-Schwartz (1975, 1982), Cohen-Levin (1989),
Ahn (2002), Aghion-Griffith (2005) and Gilbert (2006)]
(cid:73) A few recent applications estimate a dynamic game:
Xu (2008): electric motors in Korea
Goettler & Gordon (2008): Intel v. AMD
Siebert & Zulehner (2008): DRAM
Hashmi&VanBiesebroeck MarketStructureandInnovation
Introduction
Model&(static)estimation
Motivation
(Dynamic)estimation
Objectives
Application
Conclusions
In this Study
(cid:73) We study the global automobile industry
⇒ one of the most innovative
(cid:73) Dramatic changes in market structure
⇒ allow for mergers
Hashmi&VanBiesebroeck MarketStructureandInnovation
2. Characterize the different incentives for innovation:
(cid:73) Boost own demand
(cid:73) Affect innovation decision of competitors
(cid:73) Increase ownership share in (possible) future mergers
3. Study how changes in market structure (organic or discrete)
affect innovation incentives, firm value and consumer utility
(cid:73) (Perform counterfactual experiments)
Introduction
Model&(static)estimation
Motivation
(Dynamic)estimation
Objectives
Application
Conclusions
Objectives of the Study
1. To construct a dynamic model of the global automobile
industry and estimate primitives
(cid:73) Including mergers
(cid:73) Estimation is based on Bajari, Benkard, & Levin (2007)
⇒ dynamic game with continuous control variable
Hashmi&VanBiesebroeck MarketStructureandInnovation
3. Study how changes in market structure (organic or discrete)
affect innovation incentives, firm value and consumer utility
(cid:73) (Perform counterfactual experiments)
Introduction
Model&(static)estimation
Motivation
(Dynamic)estimation
Objectives
Application
Conclusions
Objectives of the Study
1. To construct a dynamic model of the global automobile
industry and estimate primitives
(cid:73) Including mergers
(cid:73) Estimation is based on Bajari, Benkard, & Levin (2007)
⇒ dynamic game with continuous control variable
2. Characterize the different incentives for innovation:
(cid:73) Boost own demand
(cid:73) Affect innovation decision of competitors
(cid:73) Increase ownership share in (possible) future mergers
Hashmi&VanBiesebroeck MarketStructureandInnovation
Introduction
Model&(static)estimation
Motivation
(Dynamic)estimation
Objectives
Application
Conclusions
Objectives of the Study
1. To construct a dynamic model of the global automobile
industry and estimate primitives
(cid:73) Including mergers
(cid:73) Estimation is based on Bajari, Benkard, & Levin (2007)
⇒ dynamic game with continuous control variable
2. Characterize the different incentives for innovation:
(cid:73) Boost own demand
(cid:73) Affect innovation decision of competitors
(cid:73) Increase ownership share in (possible) future mergers
3. Study how changes in market structure (organic or discrete)
affect innovation incentives, firm value and consumer utility
(cid:73) (Perform counterfactual experiments)
Hashmi&VanBiesebroeck MarketStructureandInnovation
Introduction
DemandSide
Model&(static)estimation
SupplySide
(Dynamic)estimation
Mergers
Application
Equilibrium
Conclusions
Demand Side Ingredients
(cid:73) Each firm possesses some technological knowledge ω ∈ R+
(observable state variable)
(cid:73) Each product has some unobserved characteristics summarized
in ξ ∈ R (unobservable state variable)
(cid:73) Industry state is s = {s ,s ,m}
ω ξ
Where s = [ω ω ... ω ] and s = [ξ ξ ... ξ ]
ω 1 2 n ξ 1 2 n
Hashmi&VanBiesebroeck MarketStructureandInnovation
Introduction
DemandSide
Model&(static)estimation
SupplySide
(Dynamic)estimation
Mergers
Application
Equilibrium
Conclusions
Expected Demand
(cid:73) The utility consumer i gets from good j is
u = θ log(ω +1)+θ log(p )+ξ +ν ≡ u˜ +ν
ij ω j p j j ij j ij
(cid:73) ν is the idiosyncratic utility assumed to follow an i.i.d.
ij
extreme value distribution
Hashmi&VanBiesebroeck MarketStructureandInnovation
Introduction
DemandSide
Model&(static)estimation
SupplySide
(Dynamic)estimation
Mergers
Application
Equilibrium
Conclusions
Data
Firm-year observations:
(cid:73) Patent data from 1975 to 2005
(cid:73) ω = sum of patents issued between 1975 and 1981
1981
(cid:73) ω =(1−δ)ω + new patents issued in 1982
1982 1981
(cid:73) Price and market share information from 1982 to 2005
(cid:73) Price: firm dummies from hedonic price regressions
(cid:73) Share: in terms of vehicles produced
Hashmi&VanBiesebroeck MarketStructureandInnovation