Innovation, Competition and Networks in the Supercomputer Industry

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This dissertation develops dynamic models to examine markets with product differentiation where both firm conduct and consumer behavior is jointly influenced by switching costs, network effects and technological innovation. In Chapter 1 I propose a structural model of competition where firms set prices, introduce new products and scrap obsolete models. Network effects and switching costs are assumed to affect product demand, resulting in endogenous network creation dynamics. The model allows for product introduction and destruction without explicit modeling of these actions by instead considering a quality investment decision. I build on recent advances on dynamic games estimation and minimum-distance sieve estimators to suggest an estimator for the model. Chapter 2 builds upon and extends the model from Chapter 1 by allowing for technological frontier investment. I estimate the model using data from the supercomputer industry. These estimates allow for counterfactual evaluation on how technological progress depends on market structure. The evidence suggests that increased levels of competition are associated with higher rates of innovation on the maximal computing speed available in the industry. I also argue that increased competition is also associated with increased welfare, but the marginal increase in welfare is decreasing in the number of competitors. Chapter 3 examines the long-run effects of a merger in the supercomputer industry. The primary methodology is to assume that firm behavior is consistent with Markov-Perfect Nash equilibrium (MPNE) both with and without a merger and that a merger can be described by changing observed industry states. The proposed method accounts for the effects of dimensions of non-price competition between manufacturers, which could lead to misleading conclusions about the merger effects if ignored in the analysis. I evaluate the effects of the merger between Hewlett-Packard and Convex on consumer welfare and technological progress. I argue that this merger led to increases on the maximal computing speed available in the supercomputer industry at the cost of small losses in consumer welfare

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  • 08/13/2018
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