Market Structure, Directed Innovation, and the Electrification Transition
Joint work with Sebastian Rausch and Oliver Schenker
Electrification is a key lever for decarbonization. Achieving it requires not only abundant, low-cost clean electricity, but also new technologies that can convert electricity into valuable economic services. While the Directed Technical Change (DTC) literature emphasizes that innovation responds to relative profit opportunities, these profits are shaped by market structure and competition intensity. Building a novel model of directed technical change with endogenous markups across energy generating and consuming sectors, we analyze how imperfect competition and technological linkages jointly shape the pace and direction of electrification. We show that competition effects, in particular free exit and entry of firms, can weaken lock-in effects that typically favor fossil technologies. Furthermore, the competition effects dampen the speed of transition, especially under strong climate policy. Policies that combine carbon pricing with research subsidies and competition policies that reduce fossil-sector markups can direct innovation incentives, achieving faster and more cost-effective electrification.