R & D, Market Structure and Profits: A Value-Based Approach

Abstract

This paper considers a complex relation among R & D, market structure and a market value-based measure of profits. Perhaps of greatest interest, a positive effect of R & D on profits emerges, as does a negative R & D-concentration interaction effect. Both appear robust, and support an and rivalrous view of R & D. Despite substantial interest in the question little direct evidence on research and development (R&D), market structure and profits relations has appeared in the literature. An important exception to this rule is Grabowski and Mueller (hereafter G-M) (1978) who reported a strong effect of R & D on adjusted profit rate data, in addition to an equally strong negative R & Dmarket concentration interaction effect. G-M interpret their findings as support for an intangible capital and rivalrous view of R & D. Alternatively, they are also consistent with the hypothesis that firms in highly concentrated markets pursue R & D less efficiently, or take on riskier projects. In any event, G-M's findings seem inconsistent with a view of R & D as a barrier to entry (see Kamien and Schwartz, 1975). This study extends previous research in at least four respects. First, we adopt a market valued-based measure of profits in order to avoid any bias inherent in accounting profit data due to an expense-as-incurred rather than capitalization and amortization treatment of R & D, advertising and similar expenditures. Second, we evaluate simultaneous influences among profits, R & D, advertising and concentration suggested, but not tested, previously. Third, estimation results are derived using Leamer's SEARCH technique which illustrates the sensitivity of estimates to alternate model specifications. And fourth, we consider an n = 390-firm Fortune 500 sample, which is substantially larger than in previous studies, including firms responsible for nearly 90% of private sector R & D during 1977. Estimation results should therefore be broadly indicative of the economic consequences of R & D.

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