Does AMD spur Intel to innovate more?
Coauthor(s): Ronald Goettler.
We propose and estimate a model of dynamic oligopoly with durable goods and endogenous innovation to better
understand the relationship between market structure and the evolution of quality. Firms make dynamic
pricing and investment decisions while taking into account the dynamic behavior of consumers who anticipate
the product improvements and declining prices. The distribution of currently owned products is a state
variable that affects current demand and evolves endogenously as consumers make replacement purchases. Our
work extends the dynamic oligopoly framework of Ericson and Pakes (1995) to incorporate durable goods and to
yield an endogenous long-run rate of innovation. We estimate the model for the PC microprocessor industry
and perform counterfactual simulations to measure the benefits of competition. Consumer surplus is 4.2
percent higher ($12 billion per year) with AMD than if Intel were a monopolist. Innovation, however, would
be 4.2 percent higher without AMD present. Counterfactuals reveal that consumer surplus can actually
increase as the market moves toward monopoly, which suggests policymakers should consider the dynamic
trade-off of lower current consumer surplus from higher prices for higher future surplus from more
innovation. Comparative statics reveal the effect on equilibrium outcomes of consumer preferences,
depreciation, market growth, product substitutability, and innovation spillovers. For example, competition
increases innovation if consumers highly value quality and have low price sensitivity or if the market
growth rate is high. We also show that under either market structure, consumers of durable goods are the
primary beneficiaries of innovation opportunities.
Source: Journal of Political Economy
Gordon, Brett, and Ronald Goettler. "Does AMD spur Intel to innovate more?" Journal of Political Economy 119, no. 6 (2011): 1141-1200.