Price Competition, Innovation and Profitability: Theory and UK Evidence

This paper examines the effect of price competition on innovation, market structure and profitability in R&D-intensive industries. The theoretical predictions are tested using UK data on the evolution of competition, concentration, innovation counts and profitability over 1952-1977. The econometric results suggest that the introduction of restrictive practices legislation in the UK had no significant effect on the number of innovations commercialised in previously cartelised R&D-intensive manufacturing industries, while it caused a significant rise in concentration in these industries. In the short run profitability decreased, but in the long run it was restored through the rise in concentration. Acknowledgments: I thank seminar participants at CEPR, the London Business School, Nuffield College (Oxford), Universidad Carlos III (Madrid) and the University of Athens for helpful comments on earlier versions of the paper. This research is part of a forthcoming book on the effects of cartel policy on firm strategy and market structure in British industry (Symeonidis, G., 2001, The Effects of Competition, MIT Press). Address for correspondence: Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K. E-mail: [email protected]