Market Structure and Innovation

Corporate innovation is often argued to result from, and be encouraged by, market competition. The tradition is to test such arguments with market concentration data; firms with stronger control over their market can afford the long-run investment of R&D. Network theory has broadened our understanding of how competition is a function of structure within and beyond a market. Producers earn high profit margins to the extent they are few and their customers and suppliers are many and disorganized. The first condition is measured by the traditional concentration ratio for a market. The second condition is measured by the network constraint of suppliers and customers. My purpose in this paper is to describe how our understanding of the market competition effect on innovation is enriched when the concentration measure of market competition tradition in economics is replaced with the network model of market competition now prevalent in sociology. Results indicate that markets facing competitive environments, in high constraint market positions, show greater R&D intensity and faster rates of innovation than do industries facing less competitive pressure. These effects persist even with controls for technological opportunity and appropriability, in contrast to traditional models using only concentration data to measure competition.