Abstract
This paper examines how market competition affects the intensity and breadth of innovation, using the formation and breakup of price fixing cartels to proxy for competition, or lack thereof. I assembled a unique dataset comprising 461 prosecuted cartel cases in the U.S. from 1975-2016, where I match 1,818 collusive firms to firm-level data on patenting and other measures of innovation. I then use a difference-in-difference methodology, matching colluding firms to various counterfactual firms. Empirical results show a negative causal relationship between competition and innovation in the cartel context. When collusion suppressed market competition, colluding firms increased R&D investment by 12%, patenting by 51%, and top-quality patents by 20%. Furthermore, at the same time, firms broadened their areas of innovation by increasing the number of patented technology fields by 33%. The main finding has a notable strategic implication – that firms shift toward innovation competition when price competition weakens. Further tests suggest that financial constraint (
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