Review of Industrial Organization 15: 367–378, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Market Power, Industrial Concentration and
ROBERT W. VOSSEN
Faculty of Management and Organization, University of Groningen, PO Box 800, 9700 AV
Groningen, the Netherlands
Abstract. This paper discusses the paradox between the positive effect of industrial concentration
on R&D spending, and its non-positive effect on the number of innovations. Also, I analyze whether
concentration has different effects on small- and large-ﬁrm R&D. The analysis shows that the positive
effect of industrial concentration on R&D spending is at least as strong for small ﬁrms as it is for
large ﬁrms within an industry, which indicates that the possession of market power is not in itself
conducive to innovative effort. In addition, high concentration appears to be attended with a loss of
efﬁciency in R&D spending.
Key words: Innovation, R&D, industrial concentration, market structure, competition.
In Schumpeter’s (1942) view it was not only the expectation of some degree of
monopoly power after a successful innovation that was a crucial incentive for ﬁrms
to engage in innovative activity, but also it had to be accepted that “the large scale
establishment or unit of control that does not work under conditions of compar-
atively free competition” had come to be the most powerful engine of economic
progress. This view contrasts with his earlier work (Schumpeter, 1912; 1939), in
which the small scale, entrepreneurial type of ﬁrm was portrayed as the driving
force of innovation.
The majority of the empirical neo-Schumpeterian literature on the relation be-
tween market structure and innovation has focused on the link between industrial
concentration and R&D. In most, a positive relationship was found, with a few
exceptions. The arguments mentioned as an explanation for a positive inﬂuence
of industry concentration on innovative behavior all pertain to the large ﬁrms in
highly concentrated industries, i.e., the ﬁrms in possession of market power, thus
concurring with the later Schumpeter (1942). However, if industrial concentration
(C4, usually) merely acts as a proxy for the market power of the largest, more inno-
vative ﬁrms, then the positive effect of industrial concentration on R&D spending
The author is indebted to Bart Nooteboom, Alfred H. Kleinknecht, and two anonymous referees
for valuable comments and suggestions.