Market structure and knowledge acquisition by firms

Abstract

Purpose

Recent models in firm theory assume that problems have to be solved for production to take place and that knowledge is the main input for problem-solving. This paper characterizes the relationship between the predictability of production prcesses and investment in knowledge.

Design/methodology/approach

This paper uses a theoretical model of firm theory to study investment in knowledge by a simplified one-layer firm with a stochastic technology, across different market structures, and develops a calibration exercise to illustrate the results.

Findings

Firms working closer to the production frontier (those with a larger efficient scale in perfect competition, facing a higher demand in monopoly or more competitive internationally in an open economy) react more in terms of investment in knowledge when problem predictability changes. Investment in knowledge becomes nearly insensitive to such changes for firms with a low output, i.e. those far from the frontier. A calibration exercise suggests that the elasticity of knowledge with respect to the predictability of problems was around 0.59 for the US economy for the period 1980–2020.

Originality/value

These are the first nonambiguous results on the relationship between the predictability of production processes and investment in knowledge and help understanding knowledge acquisition by different firms in distinct competitive environments.

Citation

Hemsley, P., Morais, R. and Di Iulio, K. (2021), "Market structure and knowledge acquisition by firms", Journal of Economic Studies, Vol. 48 No. 6, pp. 1128-1144. https://doi.org/10.1108/JES-02-2020-0071