Review of Industrial Organization 16: 13–38, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
Buyer Market Power and Innovative Activities
Evidence for the German Automobile Industry
Deutsche Bahn AG, Corporate Development: Transport and Economics, Holzmarktstr. 17, D-10179
Abstract. This empirical paper deals with the effects of supplier and buyer market concentration on
the innovative behavior of suppliers within the German automobile industry. The data set contains
ﬁrms from all size classes and covers measures of innovation input as well as innovation output. It can
be shown that (a) ﬁrms’ innovation and R&D-employment intensity will decline (increase) in buyer
concentrations if supplier markets are low (high) concentrated; (b) buyers’ pressure on input prices
reduces suppliers’ innovation expenditures and their incentive to develop new products; (c) a small
number of competitors in suppliers markets and a large stock of customers stimulates innovative
behavior; (d) small and medium sized suppliers invest more in their innovative activities but have
less probability of realizing innovations than larger ﬁrms; and (e) higher technological capabilities
lead to higher innovation input and output.
Key words: Appropriability, automobile industry, buyer market power, innovation.
In the past, empirical literature has concentrated primarily on the effects of market
concentration, technological opportunities, demand and appropriability conditions
on the innovative activities of ﬁrms (Cohen, 1995). The results have been widely
discussed (Acs and Audretsch, 1990; Frisch, 1993). In the 1960s and 1970s market
power and ﬁrm size in the tradition of Schumpeter (1948) were said to have a
signiﬁcant impact on innovative activities (Cohen et al., 1987; Geroski, 1990).
During the last few years however, recognition has increased that it is the techno-
logical opportunity of markets and technological spillovers which inﬂuence innov-
ative behavior signiﬁcantly (Arvanitis and Hollenstein, 1994, 1996; Geroski, 1992;
Klevorick et al., 1995; König and Licht, 1995; Levin, 1988). Other studies conﬁrm
that long-term demand expectations have a positive inﬂuence on the innovation
investments of ﬁrms (Cohen et al., 1987; Schmookler, 1966).
One issue however, in the econometric innovation literature has not yet been
thoroughly explored. In some industries, such as electronics, chemicals, synthetics
and automobiles, the conditions on vertically-related markets also determine the
innovative activities of ﬁrms. Because a ﬁrm’s cost of production, time of de-
velopment and/or quality of new products depend on the innovative activities of