Product market competition and the value of innovation: Evidence from US patent data

- We study the relationship between competition and market value of innovation.
- A new method to measure the market value of innovation is proposed.
- Competition and market value of innovation have an inverted U-shaped relationship.
- The finding is verified using a quasi-natural experiment with tariff-cut events.

This study investigates the relationship between product market competition and the market value of innovation using firm-level patent data of US firms over the period 1977-2005. We find that there is an inverted U-shaped relationship between competition and the value of innovation. Furthermore, we show that there is an “asymmetric” causal effect of intensifying product market competition on the market value of innovation, using a quasi-natural experiment based on tariff-cut events for US manufacturing firms between 1977 and 2006: a firm's incentive to innovate tends to get stronger in response to a tariff cut when product market competition is very mild, while it tends to get weaker when very severe.