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