State-Administered Prices and Innovation: Evidence from the Wheelchair Industry


Author Information : Kurian George (Whitman School of Management, Syracuse University)

Year of Publication : Academy of Management Proceedings (2020)

Summary of Findings : The introduction of state-administered prices in the mature wheelchair industry reduces the relative importance of process innovations vis-a-vis product as a competitive strategy, and this shift penalizes otherwise highly innovative entrants more than incumbents.

Research Questions : 1) How does the introduction of state-administered prices influences the relative importance of process and product innovations in a mature industry? 2) How does this change affect the competitive environment for new and incumbent firms in the industry?

What we know : Since process innovations help deter new entry and reduce the chances of survival of new firms during the mature stage, any change in their importance relative to product innovations can have significant implications for industry dynamics. Furthermore, since new and incumbent firms differ in the type of innovation in which they have a comparative advantage, any changes in the relative importance of product and process innovations are also likely to affect competition between such firms.

Novel Findings : Our results show that new product introductions in the wheelchair industry are substantially higher during the period in which prices are administered compared to when they are not. We find that a large proportion of these new products represent incremental innovations and are introduced by incumbent firms in response to the entry of new firms. This reflects incumbents’ relative advantage over new firms in making incremental product innovations. We also find that newly entering firms have lower survival rates during the period in which prices are administered compared to when they are not.

Implications for Practice : We shed light on how state-administered prices may require firms to adapt their market strategies and focus on product innovations instead of process innovations. Such a change may require firms to tap into different resources and develop different capabilities than the ones they had prior to the introduction of the state-administered prices.

Implications for Policy: We provide evidence for the (often unplanned) asymmetric effects that the introduction of industry-wide regulatory requirements may impose on different groups of firms. Firms that are unable to find the resources and develop the capabilities required to make product innovations are likely to be worse-off when competing against other firms in the market. New firms that do not have the large R&D teams and experience of incumbent firms are likely to be worse-off, if they are not able to develop the necessary capabilities. This could have severe implications for the industry as a whole, since new firms act as agents of change and bring outside knowledge into the industry.

Implications on Research: Previous studies on innovation that looked at the influence of regulations, such as state-administered prices, have focused on capturing the rate of innovation using measures such as patent counts, patent citations and R&D spending (Blind, 2012; Grabowski, Vernon, and Thomas 1978). However, these studies tend to treat innovation as an undiversified black box and thus do not consider how such regulations might influence the relative importance and use of different types of innovations by firms in the industry. Our study shows the value of examining the impact of regulations on different types of innovation for future research.

We also contribute to the product life cycle literature by providing evidence for an increase in dynamism in the mature stage, characterized by increased product innovations by firms, higher firm entry and exits. This provides a distinctive view of the mature stage, which has often been referred to as “stable” and theoretically “uninteresting” (Dokko et al., 2012, p.682). This has important implications for future research on firm entry and competition during the mature stage, as we show that mature-stage entrants may need to consider not only the threat of price competition but also product competition under certain regulatory conditions.

Full Citations : George, K., 2020. State-Administered Prices and Innovation: Evidence from the Wheelchair Industry. In Academy of Management Proceedings (Vol. 2020, No. 1, p. 19273).

Abstract : Integrating insights from the product life cycle literature with research on the influence of regulations on innovation, we explore the uncharacteristic innovative behavior that emerges in a mature industry in the presence of administered prices. We suggest that the resulting loss in price flexibility reduces the relative importance of process innovations vis-à-vis product innovations as a competitive strategy. Using data on the U.S. wheelchair industry, we test and find some support for our argument. Our results also show that this shift towards product innovations penalizes otherwise highly innovative entrants more than incumbents. This is because administered prices are normally coupled with product specification guidelines that limit the opportunities to make radical product innovations, in which entrants have a competitive edge.

Kurian George

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