Product Market Competition, technology spillovers and Competition Policy

Competition in product markets is a vital way in which productivity and welfare are improved in market economies. CEP research examines the role that competition plays in affecting productivity, innovation and management practices. But we also look at how policy affects competition itself. For a discussion of some issues in competition policy see:

• Interoperability and Market Foreclosure In the European Microsoft Case
• Capacity Constraints and Irreversible Investments: Defending Against Collective Dominance in UPM Kymmene/Norske Skog/Haindl.

Another question addressed in our research is how product market competition and technology spillovers affect innovation:

• Competition and Innovation: An Inverted U Relationship

From the perspective of one firm the effect of R&D by a rival firm has two effects: First the rivals' innovations can help by creating useful new ideas ('knowledge spillovers'). Secondly the rivals' innovations can harm by stealing market share from the first firm. The empirical literature has largely failed to adequately distinguish between the positive externalities (spillovers) and negative externalities (rivalry) of competitors' innovative activity. We develop theoretical foundations and conduct focused empirical analysis on US firms showing that both factors matter, on average the beneficial effects dominate. Consequently R&D will still tend to be under-supplied in the free market. See:

• Identifying Technology Spillovers and Product Market Rivalry.
• Download the latest (2010) version of this paper [PDF format]
• Download extra materials (zipped file)
• Download appendices (PDF)

We examine this model in some sectors in detail - pharmaceuticals for one and software for another in Strategic Patenting and Software Innovation

We are currently investigating semi-parametric alternatives to estimating these distance weights between different firms. In particular we are interested in whether geographical closeness matters for spillovers as well as product and technological closeness.

We have created a large firm panel of innovation and productivity by merging the US and European Patent Office data with firm level accounting information. The European dataset is called AMAPAT. The first work using this AMAPAT database examining the role of business groups in affecting innovation is available in CEP Discussion Paper 833 [PDF file].

We are also investigating some high tech industries in detail to see how our models perform in a sector where we can specify the mechanisms and models in greater detail. One such industry is computer hardware and software which has been at the centre of many competition policy debates, such as the Microsoft cases - see:

• Is There a Market for Work Group Servers? Evaluating Market Level Demand Elasticities. Using Micro and Macro Models, CEP DP 650
• The Growth of Network Computing: Quality Adjusted Price Changes for Network Servers, CEP DP 702
• Non-technical discussion of the outcome of the Microsoft case, CEP Special Paper No.20

A second high tech network industry of considerable importance is mobile telephony. This has also been the subject of anti-trust activity.

• See Testing the "Waterbed" Effect in Mobile Telephony, CEP DP 827

More general discussions of standards and network effects can be found in Co-Opetition and Prelaunch in Standard-Setting for Developing Technologies

Part of this project is funded by an European Union grant.



We are also looking at the importance of geographical distance and national boundaries to the movement of ideas. We have found the first evidence that distance appears to be dying when it comes to new knowledge.

• Related publication: Is distance dying at last? Falling home bias in fixed effects models of patent citations, CEP Discussion Paper 818, R. Griffith, S. Lee and J. Vanreenen, August 2007
  

For further work on spillovers using the Community Innovations Survey see http://cep.lse.ac.uk/pubs/download/dp0785.pdf

For further information contact Chiara Criscuolo

Related articles:

Link to CEP Press release - The Microsoft Decision

Link to news item - on the impact of the credit crunch on competition productivity