Market structure and endogenous productivity growth: how do R&D subsidies affect market structure?

Conclusions about optimal R&D policies in existing endogenous growth models rely on strong assumptions regarding market structure. In particular, each industry is dominated by a single monopoly in most models or firms are cast as oligopolistic or monopolistic competitors. A model which combines the endogenous growth framework with the Ericson and Pakes (Rev. Econom. Stud. 62 (1995) 53) model of industrial dynamics is proposed to allow for direct market competition between multiple firms in each industry. Thus key features of competition through R&D typically missing in most endogenous growth models are introduced, including: (1) non-degenerate entry and exit; (2) distribution of firm sizes; and (3) more complex market structures that vary across industries and over time. This paper presents the partial equilibrium for a single industry demonstrating how growth-promoting R&D subsidies alter the endogenously determined market structure. Subsidies to R&D 'stretch' the distribution of market shares with an increased number of firms in the market but a higher variance in the market shares across firms.