A new perspective on industry R&D and market structure

This paper aims to shed some new insights on the long-debated and both extensively and intensively explored relationship between market concentration and industry RTD intensity. In order to do so, this study develops, from a classic Dorfman-Steiner [1954] model of firm RTD, a model of industry RTD, where consumer preference over quality and price, RTD technology, and the joint distribution of firm-specific technological competence and market share jointly determine the level of industry RTD intensity. The joint distribution term, which reflects both the underlying distribution of firms-specific technological competence and the strength of its link with market share, suggests that the concentration-RTD relationship differs depending on the strength of the link or simply the appropriability of RTD in terms of market share: A positive relationship is predicted for low-appropriability industries, where market concentration supplements low RTD appropriability, while a negative or an inverted U-shaped relationship for high-appropriability industries. An empirical analysis of data, disaggregated at the five-digit SIC level, on RTD and market concentration of Korean manufacturing industries provides supportive evidence for the predictions.