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INNOVATION AND MARKET STRUCTURE: AN EMPIRICAL EVALUATION OF THE ‘BOUNDS APPROACH’ IN THE CHEMICAL INDUSTRY

Authors


  • *This paper forms part of the EU TSER project ‘From Science to Products,’ whose financial support is gratefully acknowledged. Marín and Siotis gratefully acknowledge partial support from Ministerio de Educación y Ciencia, grant SEJ2004-00670, while Siotis also gratefully acknowledges financial support from Ministerio de Ciencia y Tecnología, grant BEC2002-02194. We would like to thank Walter Garcia-Fontes, Letizia Giorgetti, Jordi Jaumandreu, Gerard Llobet, John Sutton, the editor and two anonymous referees, for useful comments and suggestions. Seminar participants in Universitat Pompeu Fabra, Universidad Carlos III de Madrid and EARIE2001 also contributed to improve this paper. Mariana Barrero, Enrique Cañizares, Miguel Nieto and José Manuel Polo provided outstanding research assistance.

Abstract

This paper applies Sutton's [1998]‘bounds approach’ to the chemical industry. The approach predicts that (i) the lower bound of the ratio of the 1-firm concentration index to product concentration is bounded away from zero at high levels of product concentration only in high R&D markets and (ii) the lower bound on market concentration is higher and increasing in product concentration in markets with higher R&D intensities. We test these two hypotheses and find that the data strongly support them. A novel feature of our analysis is the use of plant level data in defining products and the classification of products into markets based on end-use.

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