Does Competition Diminish Innovation? An Empirical Analysis of the Effect of Market Concentration on Research and Development Intensity in U.S. Manufacturing Industries

Abstract

This paper discusses the relationship of innovation and market concentration. Although economists have wrestled with the nature of this relationship for decades, the theoretical and empirical evidence remains ambiguous. With increasing market concentration across the economy and a renewed interest in antitrust discourse, the importance of clarifying the nature of the relationship looms larger. Using industry and firm level data from U.S. manufacturing industries from 2002-2016, I investigate how increasing market concentration has affected research and development intensity over time. I find some evidence to support the Schumpeterian hypothesis that market concentration increases innovation as measured by R&D intensity, while the most compelling evidence suggests that the innovation and market concentration relationship takes the form of an inverted-U shape.