MARKET STRUCTURE AND INDUSTRIAL INNOVATION

Lodewijks, J.K.

doi:10.1080/08109029008631877

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MARKET STRUCTURE AND INDUSTRIAL INNOVATION

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Author(s): J.K. Lodewijks

Publication date (Print): June 1990

Journal: Prometheus

Publisher: Pluto Journals

Keywords: concentration, evolutionary theory, innovation, market structure, R&D, Schumpeterian competition, technological change

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Abstract

Literature on the link between market structure and industrial innovation is surveyed. Part II focuses on the so-called Schumpeterian hypothesis that large firm size, diversification or monopoly power is conducive to innovation and technical progress. Both empirical studies and theoretical developments are reviewed; for the former, the difficulties are catalogued and for the latter, a critique of recent trends is developed. The effect of innovation on market structure is taken up in Part IV, while Part V portrays the merits of the new approach of Nelson and Winter in their An Evolutionary Theory of Economic Change.

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Journal ID (publisher-id): cpro20

Journal ID (archive): CPRO

Title: Prometheus

Subtitle: Critical Studies in Innovation

Publisher: Pluto Journals

ISSN (Print): 0810-9028

ISSN (Electronic): 1470-1030

Publication date (Print): June 1990

Volume: 8

Issue: 1

Pages: 108-128

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Publisher ID: 8631877 Coden ID: Prometheus, Vol. 8, No. 1, 1990: pp. 108–128

DOI: 10.1080/08109029008631877

SO-VID: afef7c86-c228-4132-ab1a-73b7bd2773f0

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Figures: 0, Tables: 0, References: 62, Pages: 21

NOTES AND REFERENCES

See M.I. Kamien and NX. Schwartz, ‘Market structure and innovation : a survey’, Journal of Economic Literature, XIII, March 1975, pp.1-37; F. M. Scherer, Industrial Market Structure and Economic Performance, Rand McNally, Chicago, 1980; D. A. Hay and D. J. Morris, Industrial Economics: Theory and Evidence, Oxford University Press, Oxford, 1979; and C. KittiandC. L. Trozzo, The Effects of Patents and Antitrust Laws, Regulations and Practices on Innovation, Vol. 1, US National Science Foundation, 1976.
R & D/research measures incorporate invention as well as post-innovation development work by firms: thus such convenient measures do not consistently reflect extent or rates of innovation. In a series of quite separate studies of significant inventions it was found that only a small proportion originated from within major firms in respective industries. The vast majority emanated from a variety of individual efforts outside of the industry, or from small firms. However, if innovation is defined as incorporating a sustained development effort, then these results are consistent with those of Freeman and others who find that large corporate R&D looms large. I am indebted to Ian Inkster for this point.
op. cit.
op. cit.
Scherer F. M.. 1967. . Research and development research allocation under rivalry. . Quarterly Journal of Economics . , Vol. 81((3)) August;: 359––94. .
Shrieves R. E.. 1976. . Firm size and innovation: further evidence. . Industrial Organisation Review . , Vol. 4((1)): 26––33. .
Rosenberg N.. 1975. . Problems in the economists’ conceptualisation of technological innovation’. . History of Political Economy . , Vol. 7((4)): 456––81. .
Comanor W. S.. 1967. . Market structure, product differentiation, and industrial research. . Quarterly Journal of Economics . , Vol. 81((4)) November;: 639––57. .
Wilson R. W.. 1977. . The effect of technological environment and product rivalry on R & D effort and licensing of inventions. . Review of Economics and Statistics . , Vol. 59:: 171––8. .
op. cit.
For example, the essence of J. E. Stiglitz, ‘Potential competition may reduce welfare’, American Economic Review, 71, 2, May 1981, pp.184-9 was already presented in Part VII, Welfare Implications of Scherer's paper.
op. cit., p.373.
Baldwin W. L. and Childs G. L.. 1969. . The fast second and rivalry in research and development,‘. . Southern Economic Journal . , Vol. 36:: 18––24. .
Needham D.. 1975. . Market structure and firms’ R&D behavior. . Journal of Industrial Economics . , Vol. 33((4)) June;: 241––55. .
op. cit., p.249.
Kamien M. I. and Schwartz N. L.. 1976. . On the degree of rivalry for maximum innovative activity. . Quarterly Journal of Economics . , Vol. 90: May;: 245––60. .
Potential rivalry monopoly profits and the pace of innovation’, Review of Economic Studies, 45, 1978, pp.548, 556.
De Bont R.. 1977. . Innovative activity and barriers to entry. . European Economic Review . , Vol. 10:: 95––109. .
Futia C. A.. 1980. . Schumpeterian competition. . Quarterly Journal of Economics . , Vol. 94((4)) June;: 675––95. .
Telser L. G.. 1982. . A theory of innovation and its effects. . Bell Journal of Economics . , Vol. 13((1)) Spring;: 69––92. .
Dasgupta P. and Stiglitz J.. 1980. . Industrial structure and the nature of innovative activity. . Economic Journal . , Vol. 358((90)) June;: 266––93. .
Barzel Y.. 1968. . Optimal timing of innovations. . Review of Economics and Statistics . , Vol. 50:: 348––55. .
Dasgupta and Stiglitz, op. cit. pp.274, 280.
ibid., p.271.
ibid., p.288.
Dasgupta P. and Stiglitz J.. 1980. . Uncertainty, industrial structure and the speed of R & D. . Bell Journal of Economics . , Vol. 11: Spring;: 1––28. .
J. Jewkes, D. Sawers and R. Stillerman, The Sources of Invention, 2nd ed., Norton, New York, 1969. See also N. M. Kay, The Innovating Firm : A Behavioural Theory of Corporate R&D, Macmillan, London, 1979, pp.13–40.
Nelson R. R.. 1961. . Uncertainty, learning and the economics of parallel R&D efforts. . Review of Economics and Statistics . , Vol. 43: November;: 351––64. .
Mansfield E.. 1977. . The Production and Application of New Industrial Technology . , new York : : Norton. .
C. T. Taylor and Z. A. Silberston, The Economic Impact of the Patent System, Cambridge University Press, 1973; Z. Griliches, ‘Productivity, R&D, and basic research at the firm level in the 1970s’, American Economic Review, 76, 1, March 1986, pp.141–54.
Mansfield E.. 1977. . Social and private rates of return from industrial innovations. . Quarterly Journal of Economics . , Vol. 91: May;: 221––40. .
See M. I. Kamien and N.L. Schwartz, ‘Technology: More or less?’, in S. Weintraub (ed.), Modern Economic Thought, Pennsylvania University Press, 1977.
op. cit., p.189.
op. cit., p.5.
Loury G. C.. 1979. . Market structure and innovation. . Quarterly Journal of Economics . , Vol. 93((3)) August;: 395––410. .
Posner R. A.. 1975. . The social costs of monopoly and regulation. . Journal of Political Economy . , Vol. 83: August;: 807––27. .
Fudenberg D. and Tirole J.. 1987. . Understanding rent dissipation: on the use of game theory in industrial organisation. . American Economic Review . , Vol. 11((2)) May;: 176––183. .
cf. J. F. Reinganum, ‘Practical applications of game theoretic models of R & D’, American Economic Review, 14, 2, May 1984, pp.61-66. R. K. Sah and J. Stiglitz, The invariance of market innovation to the number of firms’, RAND Journal of Economics, 18, 1, Spring 1987, pp.98-108, have recently used the concept of Bertrand competition to model a ‘winner-take-all’ patent race. They find that the number of firms has no effect on the pace of innovation, and under more stringent conditions, on R & D expenditures. Surprisingly, they now conclude that market expenditure on R & D is less than the socially optimal level. They also claim that efficiency will only be attained if each firm undertakes a single research project. The authors note that this may be hard to enforce!
Morris D. J.. 1986. . Strategic behaviour and industrial competition. . Oxford Economic Papers . , Vol. 38((Supp.)) November;: 7
See Fudenberg and Tirole, op. cit.
A. Phillips, Technology and Market Structure: A Study of the Aircraft Industry, D. C. Heath, Lexington, 1971. See also A. Phillips, ‘Patents, potential competition, and technical progress’, American Economic Review, 61, 2, May 1966, pp.301–10.
Phillips, 1971, p.130.
Kamien and Schwartz, 1975, p.12.
B. H. Klein, Dynamic Economics, Harvard University Press, 1977.
R. C. Levin, Toward an Empirical Model of Schumpeterian Competition, Mimeo., January 1981.
E. g., W. G. Shepherd, “Contestability’ vs Competition’, American Economic Review, 74, 4, 1984, pp.572-87; M. Schwartz, ‘The nature and scope of contestability theory’, Oxford Economic Papers, 38, November 1986 Supp., pp.37–57.
Another key heterodox work is Kay, op. cit. This presents a very useful empirical and theoretical critique of the rational model of innovation (pp.13-40), and develops an alternative approach based on concepts from general systems theory.
See Nelson, op.cit. See also “Issues and suggestions for the study of industrial organisation in a regime of rapid technical change’, in V. R. Fuchs (ed.), Policy Issues and Research Opportunities in Industrial Organisation, Columbia University Press, 1972; “Recent exercises in growth accounting : new understanding or dead end?” American Economic Review. 63, 3, June 1973, pp.462-8; R. R. Nelson and S. G. Winter, ‘Toward an evolutionary theory of economic capabilities’, American Economic Review, 63, 2, May 1973, pp.440-9; ‘Neoclassical vs evolutionary theories of economic growth : critique and prospectus’, Economic Journal, 336, 84, 1974, pp.886-905; ‘Growth theory from an evolutionary perspective: the differential productivity puzzle’, American Economic Review, 65, 2, May 1975, pp.338-44; ‘Factor price changes and factor substitution in an evolutionary model’, Bell Journal of Economics, 6, 2, 1975, pp.466-86; ‘In search of a useful theory of innovation, Research Policy, 6, 1977, pp.36-76. ‘Simulation of Schumpeterian competition’, American Economic Review, 67, 1, 1977, pp.271-6; ‘Dynamic competition and technical progress’, in B. Balassa and R. R. Nelson (eds) Economic Progress, Private Values and Public Policy: Essays in Honor of William Fellner, North-Holland, Amsterdam, 1977; “Forces generating and limiting concentration under Schumpeterian competition’, Bell Journal of Economics, 9, 2, 1978, pp.524-48; ‘Research on productivity growth and productivity differences : dead ends and new departures’, Journal of Economic Literature, 19, 3, 1981, pp.1029-64; ‘The Schumpeterian trade-off revisited’, American Economic Review, 72, 1, March 1982, pp. 114-32; An Evolutionary Theory of Economic Change, Harvard University Press, 1982; R. R. Nelson, S. G. Winter and H. Schultz, ‘Technical change in an evolutionary model’, Quarterly Journal of Economics, 90, 1976, pp.90-118.
1972, op.cit.
1981, op. cit.
These simulations use the data from R. M. Solow, ‘Technical change and the aggregate production function’, Review of Economics and Statistics, 39, 1957, pp.312–20.
Nelson and Winter, An Evolutionary Theory of Economic Change, p.147.
ibid., p.210.
Nelson and Winter, Bell Journal, 1975.
Nelson and Winter, 1978, op. cit.
Nelson and Winter, American Economic Review, 1982, p.117.
See W. J. Baumol, ‘An evolutionary theory of economic change’, Review article, Journal of Economic Literature, 21, 2, June 1983, pp.580-1; B. J. Loasby, ‘An evolutionary theory of economic change’, Review article, Economic Journal, 371, 93, September 1983, pp.652-4; P.H. Rubin, ‘An evolutionary theory of economic change’, Review article, Journal of Political Economy, 91, 4, August 1983, pp.718-70; P. Stoneman, An evolutionary theory of economic change, Review article, Journal of Economic History, March 1986.
Loasby, op.cit., p.653.
Bell Journal, 1975, p.481.
An Evolutionary Theory of Economic Change.
ibid., p.117.
C.T. Hill and J.M. Utterback (eds), Technological Innovation for a Dynamic Economy, Pergamon, New York, 1979.

Comments

Comment on this article

[1] See M.I. Kamien and NX. Schwartz, ‘Market structure and innovation : a survey’, Journal of Economic Literature, XIII, March 1975, pp.1-37; F. M. Scherer, Industrial Market Structure and Economic Performance, Rand McNally, Chicago, 1980; D. A. Hay and D. J. Morris, Industrial Economics: Theory and Evidence, Oxford University Press, Oxford, 1979; and C. KittiandC. L. Trozzo, The Effects of Patents and Antitrust Laws, Regulations and Practices on Innovation, Vol. 1, US National Science Foundation, 1976.

[2] R & D/research measures incorporate invention as well as post-innovation development work by firms: thus such convenient measures do not consistently reflect extent or rates of innovation. In a series of quite separate studies of significant inventions it was found that only a small proportion originated from within major firms in respective industries. The vast majority emanated from a variety of individual efforts outside of the industry, or from small firms. However, if innovation is defined as incorporating a sustained development effort, then these results are consistent with those of Freeman and others who find that large corporate R&D looms large. I am indebted to Ian Inkster for this point.

[3] op. cit.

[4] op. cit.

[5] Scherer F. M.. 1967. . Research and development research allocation under rivalry. . Quarterly Journal of Economics . , Vol. 81((3)) August;: 359––94. .

[6] Shrieves R. E.. 1976. . Firm size and innovation: further evidence. . Industrial Organisation Review . , Vol. 4((1)): 26––33. .

[7] Rosenberg N.. 1975. . Problems in the economists’ conceptualisation of technological innovation’. . History of Political Economy . , Vol. 7((4)): 456––81. .

[8] Comanor W. S.. 1967. . Market structure, product differentiation, and industrial research. . Quarterly Journal of Economics . , Vol. 81((4)) November;: 639––57. .

[9] Wilson R. W.. 1977. . The effect of technological environment and product rivalry on R & D effort and licensing of inventions. . Review of Economics and Statistics . , Vol. 59:: 171––8. .

[10] op. cit.

[11] For example, the essence of J. E. Stiglitz, ‘Potential competition may reduce welfare’, American Economic Review, 71, 2, May 1981, pp.184-9 was already presented in Part VII, Welfare Implications of Scherer's paper.

[12] op. cit., p.373.

[13] Baldwin W. L. and Childs G. L.. 1969. . The fast second and rivalry in research and development,‘. . Southern Economic Journal . , Vol. 36:: 18––24. .

[14] Needham D.. 1975. . Market structure and firms’ R&D behavior. . Journal of Industrial Economics . , Vol. 33((4)) June;: 241––55. .

[15] op. cit., p.249.

[16] Kamien M. I. and Schwartz N. L.. 1976. . On the degree of rivalry for maximum innovative activity. . Quarterly Journal of Economics . , Vol. 90: May;: 245––60. .

[17] Potential rivalry monopoly profits and the pace of innovation’, Review of Economic Studies, 45, 1978, pp.548, 556.

[18] De Bont R.. 1977. . Innovative activity and barriers to entry. . European Economic Review . , Vol. 10:: 95––109. .

[19] Futia C. A.. 1980. . Schumpeterian competition. . Quarterly Journal of Economics . , Vol. 94((4)) June;: 675––95. .

[20] Telser L. G.. 1982. . A theory of innovation and its effects. . Bell Journal of Economics . , Vol. 13((1)) Spring;: 69––92. .

[21] Dasgupta P. and Stiglitz J.. 1980. . Industrial structure and the nature of innovative activity. . Economic Journal . , Vol. 358((90)) June;: 266––93. .

[22] Barzel Y.. 1968. . Optimal timing of innovations. . Review of Economics and Statistics . , Vol. 50:: 348––55. .

[23] Dasgupta and Stiglitz, op. cit. pp.274, 280.

[24] ibid., p.271.

[25] ibid., p.288.

[26] Dasgupta P. and Stiglitz J.. 1980. . Uncertainty, industrial structure and the speed of R & D. . Bell Journal of Economics . , Vol. 11: Spring;: 1––28. .

[27] J. Jewkes, D. Sawers and R. Stillerman, The Sources of Invention, 2nd ed., Norton, New York, 1969. See also N. M. Kay, The Innovating Firm : A Behavioural Theory of Corporate R&D, Macmillan, London, 1979, pp.13–40.

[28] Nelson R. R.. 1961. . Uncertainty, learning and the economics of parallel R&D efforts. . Review of Economics and Statistics . , Vol. 43: November;: 351––64. .

[29] Mansfield E.. 1977. . The Production and Application of New Industrial Technology . , new York : : Norton. .

[30] C. T. Taylor and Z. A. Silberston, The Economic Impact of the Patent System, Cambridge University Press, 1973; Z. Griliches, ‘Productivity, R&D, and basic research at the firm level in the 1970s’, American Economic Review, 76, 1, March 1986, pp.141–54.

[31] Mansfield E.. 1977. . Social and private rates of return from industrial innovations. . Quarterly Journal of Economics . , Vol. 91: May;: 221––40. .

[32] See M. I. Kamien and N.L. Schwartz, ‘Technology: More or less?’, in S. Weintraub (ed.), Modern Economic Thought, Pennsylvania University Press, 1977.

[33] op. cit., p.189.

[34] op. cit., p.5.

[35] Loury G. C.. 1979. . Market structure and innovation. . Quarterly Journal of Economics . , Vol. 93((3)) August;: 395––410. .

[36] Posner R. A.. 1975. . The social costs of monopoly and regulation. . Journal of Political Economy . , Vol. 83: August;: 807––27. .

[37] Fudenberg D. and Tirole J.. 1987. . Understanding rent dissipation: on the use of game theory in industrial organisation. . American Economic Review . , Vol. 11((2)) May;: 176––183. .

[38] cf. J. F. Reinganum, ‘Practical applications of game theoretic models of R & D’, American Economic Review, 14, 2, May 1984, pp.61-66. R. K. Sah and J. Stiglitz, The invariance of market innovation to the number of firms’, RAND Journal of Economics, 18, 1, Spring 1987, pp.98-108, have recently used the concept of Bertrand competition to model a ‘winner-take-all’ patent race. They find that the number of firms has no effect on the pace of innovation, and under more stringent conditions, on R & D expenditures. Surprisingly, they now conclude that market expenditure on R & D is less than the socially optimal level. They also claim that efficiency will only be attained if each firm undertakes a single research project. The authors note that this may be hard to enforce!

[39] Morris D. J.. 1986. . Strategic behaviour and industrial competition. . Oxford Economic Papers . , Vol. 38((Supp.)) November;: 7

[40] See Fudenberg and Tirole, op. cit.

[41] A. Phillips, Technology and Market Structure: A Study of the Aircraft Industry, D. C. Heath, Lexington, 1971. See also A. Phillips, ‘Patents, potential competition, and technical progress’, American Economic Review, 61, 2, May 1966, pp.301–10.

[42] Phillips, 1971, p.130.

[43] Kamien and Schwartz, 1975, p.12.

[44] B. H. Klein, Dynamic Economics, Harvard University Press, 1977.

[45] R. C. Levin, Toward an Empirical Model of Schumpeterian Competition, Mimeo., January 1981.

[46] E. g., W. G. Shepherd, “Contestability’ vs Competition’, American Economic Review, 74, 4, 1984, pp.572-87; M. Schwartz, ‘The nature and scope of contestability theory’, Oxford Economic Papers, 38, November 1986 Supp., pp.37–57.

[47] Another key heterodox work is Kay, op. cit. This presents a very useful empirical and theoretical critique of the rational model of innovation (pp.13-40), and develops an alternative approach based on concepts from general systems theory.

[48] See Nelson, op.cit. See also “Issues and suggestions for the study of industrial organisation in a regime of rapid technical change’, in V. R. Fuchs (ed.), Policy Issues and Research Opportunities in Industrial Organisation, Columbia University Press, 1972; “Recent exercises in growth accounting : new understanding or dead end?” American Economic Review. 63, 3, June 1973, pp.462-8; R. R. Nelson and S. G. Winter, ‘Toward an evolutionary theory of economic capabilities’, American Economic Review, 63, 2, May 1973, pp.440-9; ‘Neoclassical vs evolutionary theories of economic growth : critique and prospectus’, Economic Journal, 336, 84, 1974, pp.886-905; ‘Growth theory from an evolutionary perspective: the differential productivity puzzle’, American Economic Review, 65, 2, May 1975, pp.338-44; ‘Factor price changes and factor substitution in an evolutionary model’, Bell Journal of Economics, 6, 2, 1975, pp.466-86; ‘In search of a useful theory of innovation, Research Policy, 6, 1977, pp.36-76. ‘Simulation of Schumpeterian competition’, American Economic Review, 67, 1, 1977, pp.271-6; ‘Dynamic competition and technical progress’, in B. Balassa and R. R. Nelson (eds) Economic Progress, Private Values and Public Policy: Essays in Honor of William Fellner, North-Holland, Amsterdam, 1977; “Forces generating and limiting concentration under Schumpeterian competition’, Bell Journal of Economics, 9, 2, 1978, pp.524-48; ‘Research on productivity growth and productivity differences : dead ends and new departures’, Journal of Economic Literature, 19, 3, 1981, pp.1029-64; ‘The Schumpeterian trade-off revisited’, American Economic Review, 72, 1, March 1982, pp. 114-32; An Evolutionary Theory of Economic Change, Harvard University Press, 1982; R. R. Nelson, S. G. Winter and H. Schultz, ‘Technical change in an evolutionary model’, Quarterly Journal of Economics, 90, 1976, pp.90-118.

[49] 1972, op.cit.

[50] 1981, op. cit.

[51] These simulations use the data from R. M. Solow, ‘Technical change and the aggregate production function’, Review of Economics and Statistics, 39, 1957, pp.312–20.

[52] Nelson and Winter, An Evolutionary Theory of Economic Change, p.147.

[53] ibid., p.210.

[54] Nelson and Winter, Bell Journal, 1975.

[55] Nelson and Winter, 1978, op. cit.

[56] Nelson and Winter, American Economic Review, 1982, p.117.

[57] See W. J. Baumol, ‘An evolutionary theory of economic change’, Review article, Journal of Economic Literature, 21, 2, June 1983, pp.580-1; B. J. Loasby, ‘An evolutionary theory of economic change’, Review article, Economic Journal, 371, 93, September 1983, pp.652-4; P.H. Rubin, ‘An evolutionary theory of economic change’, Review article, Journal of Political Economy, 91, 4, August 1983, pp.718-70; P. Stoneman, An evolutionary theory of economic change, Review article, Journal of Economic History, March 1986.

[58] Loasby, op.cit., p.653.

[59] Bell Journal, 1975, p.481.

[60] An Evolutionary Theory of Economic Change.

[61] ibid., p.117.

[62] C.T. Hill and J.M. Utterback (eds), Technological Innovation for a Dynamic Economy, Pergamon, New York, 1979.

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