Estimating the Innovator’s Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry

Why do incumbent firms innovate more slowly than entrants? This incumbententrant timing gap is the key to understanding the industry dynamics of “creative destruction.” Theories predict cannibalization between existing and new products delays incumbents’ innovation, whereas preemptive motives accelerate it, and incumbents’ cost (dis)advantage would further reinforce these tendencies. To empirically quantify these three forces, I develop and estimate a dynamic oligopoly model using a unique panel dataset of hard disk drive (HDD) manufacturers (1981–98), which I constructed from industry publications. The results suggest that despite strong preemptive motives and a substantial cost advantage over entrants, incumbents are reluctant to innovate because of cannibalization, which can explain at least 51% of the timing gap. I then discuss managerial implications of the findings, as well as welfare consequences of broad patents, trade barriers, and other competition/innovation policies. ∗Anderson School of Management, UCLA. E-mail: [email protected]. I thank Daniel Ackerberg, Ron Adner, Jinyong Hahn, Hugo Hopenhayn, Edward Leamer, Phillip Leslie, Rosa Matzkin, Matthew Mitchell, Ichiro Obara, Marc Rysman, Mariko Sakakibara, Connan Snider, Raphael Thomadsen, Kosuke Uetake, and Yong Hyeon Yang for suggestions. I thank Minha Hwang for sharing engineering expertise and managerial insights into the manufacturing processes. I thank James Porter, the editor of DISK/TREND Reports, for sharing his encyclopedic industry knowledge and for making the reports available. I thank Clayton Christensen for inspiration and encouraging a new approach to the innovator’s dilemma. Previous versions of the paper were presented at IIOC, TADC, and REER. Financial support from the the Nozawa Fellowship, the UCLA CIBER, and the Dissertation Year Fellowship is gratefully acknowledged. An earlier version of the paper received Best Student Paper Award at the 11th Annual REER at Georgia Tech.