Price Competition, Innovation and Profitability: Theory and UK Evidence

This Paper examines the effect of price competition on innovation, market structure and profitability in R&D-intensive industries. The theoretical predictions are tested using UK data on the evolution of competition, concentration, innovation counts and profitability over 1952-77. The econometric results suggest that the introduction of restrictive practices legislation in the UK had no significant effect on the number of innovations commercialized in previously cartelized R&D-intensive manufacturing industries, while it caused a significant rise in concentration in these industries. In the short run profitability decreased, but in the long run it was restored through the rise in concentration.