Competition and Product Innovation in Dynamic Oligopoly
Published in Quantitative Marketing and Economics, 2014
We develop and estimate a dynamic oligopoly model of competition in the market for computer processors. Firms invest in R&D to improve the quality of their products, and compete in prices. Consumers are forward-looking and heterogeneous, and make dynamic adoption decisions. We estimate the model using detailed market- and consumer-level data from 1993–2004. We then use the estimated model to conduct counterfactual simulations to quantify the effect of competition on prices, innovation, and consumer welfare. We find that competition from AMD substantially increased the pace of innovation by Intel, leading to large gains in consumer welfare. The results suggest that even a relatively small rival can have a profound impact on a dominant firm’s incentives to innovate.
Recommended citation: Goettler, R. L. & Gordon, B. R. (2014). "Competition and Product Innovation in Dynamic Oligopoly." Quantitative Marketing and Economics. 12(1), 1-42.
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