Product Market Competition, Regulation and Innovation: the Impact of Electricity Market Liberalization on Innovation in the Power Generation Sector

Abstract: This thesis investigates the relationship between product market competition, regulation and innovation. A challenge associated with studying this relationship is the reverse causality between competition and innovation. I therefore use the exogenous variation in the competitive conditions in the national power generation markets resulting from EU-wide deregulation of the European electricity markets. I furthermore argue that the regulatory change in this highly concentrated sector is a better approximation of the market structure and the competitive conditions in the sector than standard competition measures. The thesis tests the theory of an inverted-U relationship between competition and innovation introduced by Aghion et al. [2005]. This theory proposes that firms consider the difference in their pre- and post- innovation rents when investing in R&D. A strong inverted U-shape pattern is found between product market regulation and innovative output of European power generation firms, as measured by their patents. This pattern is even stronger when the patent value is adjusted by forward citations.