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The dynamics of market structure and R&D competition

Domingues Rodrigues, Ana Sofia (2007) The dynamics of market structure and R&D competition. PhD thesis, University of York.

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Abstract

This thesis investigates the articulation of ~he incentives to perform Research and Development of profit seeking firms. Throughout the thesis, the dynamic evolution of the distribution of these incentives across firms is the engine of industry transformation and growth. Thus, in order to a.'5SesS the impact of different industry characteristics on the market structure, we need a faithful picture of the context where firms make their R&D choices. Chapter.one exposes more in detail the motivation to pursue the analysis developed in each chapter independently, and how they combine to build up' the search for the understanding of the interactions between R&D, appropriability and market structure. Chapter two presents a dynamic model of the firm size distribution. Empirical studies of the firm size distribution often compare its moments to those of a log-normal distribution, as implied by Gibrat's Law, and note important deviations. Thus, the first and basic questions addressed in the first chapter are how well does the dynamic industry model reproduce Gibrat's Law and how well does it match the deviations uncovered in the literature. We show that the model reproduces these results when testing the simulated output USing the techniques, of the empirical literature. We then use the model to study how structural parameters affect the firm size distribution. We find that, among other things, fixed and sunk costs increase both the mean and variance of the firm size distribution while generally decreasing the skewness and kurtosis. The rate of growth in an industry also raises the mean and variance, but has non-monotonic effects on the higher moments. In the third chapter we explore the implications of different degrees of R&D appropriability on market structure and welfare. We propose a framework to -- pursue this analysis by extending the ¥arkov-Perfect dynamic industry model proposed by Ericson and Pakes (E-P, henceforth) (1995) through the introdu~tion of a non-proprietary productivity component to R&D as part of a dynamic, stochastic process. We first assume that spillovers are costlessly absorbed and exploited by firms in the industry, and find that, in this case, a free rider problem arises, thereby decreasing the incentives for investment. This leads to a lower amount of innovations being developed in the industry, which in turn, implies lower consuriier welfare while leaving the degree of concentration in the industry fairly unchanged. We then model a settmg where it is assumed that in order to build its absorptive capacity the firm has to engage in some R&D of its own. In this case, we find that an increase in spillovers will enhance both consumer and producer welfare substantially, and increases the likelihood of neck-and-neck competition, therefore reduciJ;lg the level of concentration in the industry. These results arise from the fact that having absorptive capacity being.built as a byproduct ofR&D enhances the productivity ofR&D investment, compensating for the free rider effect associated with the lack of appropriability. The frameworks used in the two first chapters suffer from the 'curse of dimensionality', such that the industries under analysis are limited in terms of the number of agents simultaneously active. In order to overcome this problem, in chapter four we move away from oligopolistic market structures and propose a model of monopolistic competition, where firms are sufficiently large to generate a firm size distribution with a certain degree of asYIDlIletry, although each firm is too small to affect the industry's outcome. Furthermore, we account for industry growth by having the industry's output increasing over time as a result ofknowledge externalities. The rich micro set-up of this model is analogous to .that of E-P (1995), as it is composed by heterogeneous :firms making their in- .~ vestment decisions in a world of uncertainty, but we abstract from entry and exit and instead of an oligopolistic market structure we model a monopolistic competition environment with many, heterogeneous firms. In thiS setting, :firms are asYmmetric in terms of the technology they use to produce a given commodity, and they are able to increase the likelihood of decreasing their marginal costs of production by investing in Cost Reducing R&D. In order to evaluate their future stream of profits and make their investment decisions :firms only care about the eV9lution of their efficiency and the long-run efficiency index in the industry. Cutting down the oligopolistic interactions present in the E-P framework, and having firms looking at the long-run average industry state, allows us to overcome the curse of dimensionality usually associated with dynamic models with agent heterogeneity. Therefore, we are able to simulate the model with a large number of firms competing in the industry and we show that, contrary to most existing endogenouS growth models, this model is able to deliver a firm size distribution with a substantial degree of heterogeneity. Chapter 6 presents the final remarks to the investigation carried out in this thesis.

Item Type: Thesis (PhD)
Academic Units: The University of York > Economics and Related Studies (York)
Identification Number/EthosID: uk.bl.ethos.485353
Depositing User: EThOS Import (York)
Date Deposited: 24 Sep 2015 14:38
Last Modified: 24 Sep 2015 14:38
URI: http://etheses.whiterose.ac.uk/id/eprint/9947

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