The nature of market competition and innovation: does competition improve innovation output?

The modelling of the relationship between innovation and competition through the theory of auction is simplistic. Researchers are re-evaluating previously tenuous assumptions in order to validate these thoughts for empirical use. However, the empirical verifications of this modelling remain fragmented and often unsatisfactory. Our study proposes different empirical approaches by testing the type of competition (Bertrand versus Cournot) between industries and by doing a more rigorous (by incorporating all specifications of auction models including uncertainty, extension of the property rights and capital constraints) and general (by constructing multi-sector data) verification. This paper explores also the rich information of the Community Innovation Survey. It groups together detailed innovation data sets and the patent data from the European Patent Office for France. The constructed data come from 612 firms financed by public Research and Development (R&D) investment (hereafter called public sector) and 3240 firms financed by private R&D investment (hereafter called civil sector). Our results, based mainly on a random coefficient model, illustrate that at the public sector, competition index is not correlated with innovation output. This is consistent with the belief that product market competition does not stimulate product innovation in this sector. At the civil sector, the competition index is positively and strongly correlated with innovation output. This result is expected since innovation for conquering new markets seems to be important for the civil sector. The market drives innovation output.