PRODUCT MARKET COMPETITION AND UPSTREAM INNOVATION: EVIDENCE FROM THE US ELECTRICITY MARKET DEREGULATION

This paper studies the innovation response of upstream technology suppliers when their downstream buyers transition from regulation to competition. By modeling the impact of the 1990s U.S. electricity deregulation on patenting, we find that after deregulation, the net competition effect (comprising the pure competition and the escape competition effect) decreased innovation by 18.3% and the appropriation effect increased innovation by 19.6%. Other deregulation factors have led to a 20.6% decline. In aggregate, after deregulation, innovation by the upstream technology suppliers has declined by 19.3%, and upstream innovation quality and generality have declined as well.