Information Technology, Innovation and Market Structure (Research Seminar, February 7th, 2002) Korhan Gurkan Stanford University Abstract: We model innovation as a parallel search among experiments with stochastic outcomes. A game-theoretic model of product development is advanced, using elements of extreme value theory and the theory of industrial organization. The resulting equilibrium market structure can have either of two distinct forms. In the traditional market structure, each firm experiments once, and the number of firms in the industry is determined largely by market attributes such as demand elasticity, marginal production cost, and the cost of experimentation. In the innovation-intensive market structure, firms make multiple experiments, and industry structure is substantially affected by the tail shape parameter of the distribution of R&D outcomes. Industries with heavy right-hand tailed R&D processes, such as, information-intensive industries, are characterized by fewer firms that conduct a larger number of experiments, which results in higher-quality products and larger R&D spending. As Information Technology (IT) costs decline, the prevailing market structure changes. Traditional industries shift toward an innovation-intensive structure, and in cases where there was no industry before, new ones emerge. Furthermore, industries with R&D outcomes that have heavy right-hand tails go through market consolidation as a result of declining IT costs, whereas all other industries become more fragmented