UC Riverside

This dissertation consists of three essays that investigate the relationship between competition and firms' innovation. Chapter 1 provides an introduction to this dissertation. In Chapter 2, I construct a structural model of dynamic duopoly for durable goods to examine how competition affects firms' endogenous innovation with optimal releasing time. Firms dynamically decide pricing, how much to invest in R

amp;D, and when to release new versions. I estimate my model using data of the personal computer microprocessor industry with the Intel-AMD duopoly. Comparing the baseline market structure of duopoly and the counterfactual without AMD present, I find that firms' average investment is 12.4% less and the frontier quality upgrading rate is 0.9% lower in monopoly, but the average new product releasing probability is slightly higher. Moreover, the industry profit is decreased by 10%, and consumer surplus is reduced by 4.7% without competition.

In Chapter 3, I construct another structural model of a dynamic duopoly with multi-product firms to examine how competition affects firms' strategic innovations on high-end and low-end product lines. I identify and estimate the model using data of the US-brand large SUV industry with GM-Ford duopoly, in the circumstance where firms' R&D choices between product lines are unobserved. I find that in the case where the competitor devotes itself to upgrading only high-end products, the firm chooses to compete face-to-face with its competitor: keeping investments in high-end products to remain competitive but reducing investments in low-end ones to save effort. When the competitor puts more effort into the low-end product line, the firm reacts by investing predominantly in both lines to build up market power thoroughly.

In Chapter 4, I construct and numerically analyze a structural model of a dynamic duopoly with multi-product firms to examine how competition affects firms' strategic high-end product innovation and low-end process innovation. I find that firms' high-end product innovation is nearly nineteen times higher with the competitor present, but the low-end process innovation is 10% lower. Firms invest comparably in the high-end and low-end product lines in a duopoly, but the monopolist only focuses on the low-end process innovation, which demands less effort. The results demonstrate the dramatically positive effect of competition on quality advancement, product differentiation, and social surplus.