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 R&D intensity. In order to do so, this study develops, from a classic Dorfman-Steiner [1954] model of firm R&D, a model of industry R&D, where consumer preference over quality and price, R&D technology, and the joint distribution of firm-specific technological competence and market share jointly determine the level of industry R&D 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-R&D relationship differs depending on the strength of the link or simply the appropriability of R&D in terms of market share: A positive relationship is predicted for low-appropriability industries, where market concentration supplements low R&D 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 R&D and market concentration of Korean manufacturing industries provides supportive evidence for the predictions