Competition and Innovation in Automobile Markets

Using data on the U.S. automobile market, we empirically examine the link between competition and innovation. While the automobile industry is a traditional one and has existed for well over a 100 years, it remains dynamic with multiple firms striving to push the frontiers of innovation and technology, and vying for market share. To examine the above relationship, we use firm-level time-series data over a long horizon (1969-2012) for nine well established firms selling in the U.S. market (GM, Ford, Chrysler, Toyota, Honda, Nissan, Volkswagen, BMW and Daimler). Some of our key findings are: 1. Examining the relationship between firm-specific market shares and patents, we find that in general an increase in firms’ shares leads to increase in patenting. But the estimated elasticities vary considerably across the different sub-samples; 2. Considering market-wide competition, we find that greater competition (lower HHI) generates an increase in total innovation (number of patents) in the market. We also find that the relationship between the HHI and total patents is moderately nonlinear, and consistent with the predictions of some of the theoretical models; 3. Our results indicate relatively strong path-dependence in firms’ innovation behavior; and 4. We find other interesting results related to the Clean Air Act, Voluntary Export Restraints, the Daimler-Chrysler merger, GM’s bankruptcy, and the cyclicality of innovation paths.