Innovation and Market Structure: An Empirical Evaluation of the 'Bounds Approach

Abstract

This Paper empirically tests the ‘bounds approach’ to industry structure proposed by Sutton (1991, 1998). To carry out this task, we focus on the chemical industry. Part of the novelty in this exercise is that we work on the finest possible level of disaggregation. Also, we identify demand substitutability from direct industry sources. This allows us to carefully define markets, and identify R&D intensity for each of them. Our empirical specification allows us to simultaneously test the predictions of Sutton (1991) and Sutton (1998). Our results provide strong support to Sutton’s theoretical framework.