Innovation Dynamics and Endogenous Market Structure

This paper examines empirically the relationship between innovation and market structure within a simultaneous framework at the industry level of ag-gregation. We use a model in which R&D affects both, demand and cost conditions. An optimization process leads to optimal industry R&D expenditure and market structure in a symmetric equilibrium. The model is applied to a newly constructed panel for Germany. Generalized Method of Moments (GMM) estimation techniques for dynamic panel data systems are used to estimate the parameters of interest. We found a positive long–run effect of R&D on markets’ sales concentration. In con-trast, competition enforces innovation, i.e. sales concentration has a negative impact on R&D.

Gottschalk, Sandra and Norbert Janz (2001), Innovation Dynamics and Endogenous Market Structure, ZEW Discussion Paper No. 01-39, Mannheim.