DP8289 Competitive Pressure and the Adoption of Complementary Innovations

Author(s): Tobias Kretschmer, Eugenio J Miravete, Jose C Pernías
Publication Date: March 2011
Keyword(s): Competitive Pressure, Complementarity, Product and Process Innovation
JEL(s): C35, L86, O31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8289

Liberalization of the European automobile distribution system in 2002 limits the ability of manufacturers to impose vertical restraints, leading to a substantial increase in competitive pressure among dealers. We estimate an equilibrium model of profit maximization to evaluate how dealers change their innovation adoption strategies following the elimination of exclusive territories. Using French data we evaluate the existence of complementarities between the adoption of software applications and the scale of production. Firms view these innovations as substitutes and concentrate their effort in one type of software as they expand their scale of production. Results are robust to the existence of unobserved heterogeneity.