Extending the Frontier: A Structural Model of Investment and Technological Competition in the Supercomputer Industry

This paper proposes and estimates a dynamic structural model of innovation in the super- computer industry to evaluate the dependence of technological innovation on market structure. The model has two key features. First, it allows for technological leapfrogging while controlling for multiproduct ?rm pro?ts. Second, it uses the inclusive value of Nevo and Rossi (2007) to de- ?ne quality adjustment, which controls for ?rm entry, exit, product introduction and scrappage without modeling these decisions explicitly. Model estimates facilitate counterfactual compar- isons of how the maximal computing speed evolution di?ers under di?erent market structures. Consistent with the importance of a "selection e?ect" (Aghion et al, 2001, 2005), increased levels of competition are associated with a higher rates of innovation and increased welfare. However, the marginal increase in welfare is decreasing in the number of competitors.