Estimating the Innovator's Dilemma : Structural Analysis of Creative Destruction in the Hard Disk Drive Industry, 1981-1998

This paper studies strategic industry dynamics of creative destruction in which firms and technologies experience turnover. Theories predict cannibalization between existing and new products delays incumbents’ innovation, whereas preemptive motives accelerate it. Incumbents’ cost (dis)advantage relative to that of entrants would further reinforce these tendencies. To empirically assess these three forces, I develop and estimate a dynamic oligopoly model using a unique panel dataset of hard disk drive (HDD) manufacturers (1981–98). The results suggest that despite strong preemptive motives and a substantial cost advantage over entrants, cannibalization makes incumbents reluctant to innovate, which can explain at least 57% of the incumbent-entrant innovation gap. I then assess hypothetical policy interventions concerning broad patents and license fees, and find the industry’s welfare trajectory difficult to outperform