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Managing Spillovers: An Endogenous Sunk Cost Approach

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  • Olena Senyuta
  • Kresimir Zigic

Abstract

We introduce spillover e¤ect into John Sutton's (1991,1998) concept of endogenous sunk costs. These sunk costs appear in the form of R&D investment into quality in our framework. We show that with spillovers increasing and the effectiveness of investment in raising quality decreas- ing, the Sutton lower bound on concentration for an industry decreases and ultimately collapses to zero when spillovers are large enough and/or effectiveness of investment in raising quality is low enough. In the second part, we allow firms to protect their investment against spillovers We focus on symmetric pure strategy Nash equilibria, where all firms either protect their investment or do not protect at all. Contrary to the result with exogenous spillovers assumed in the first part, in the second part of the paper we show that higher ex ante spillovers and/or lower effectiveness of investment in raising quality may induce firms to protect themselves against spillovers, leading to higher investment in quality, and to more concentrated market structure. Thus, the Sutton's result on the concentration bound is preserved, if we allow firms to manage spillovers via private protection.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp472.

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Date of creation: Nov 2012
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Handle: RePEc:cer:papers:wp472

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Related research

Keywords: endogenous sunk costs; knowledge spillovers; R&D; inno- vations; market concentration;

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References

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  1. AMIR, Rabah & EVSTIGNEEV, Igor & WOODERS, John, . "Noncooperative versus cooperative R&D with endogenous spillover rates," CORE Discussion Papers RP -1650, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Antonio Tesoriere, 2008. "A Further Note on Endogenous Spillovers in a Non-tournament R&D Duopoly," Review of Industrial Organization, Springer, vol. 33(2), pages 177-184, September.
  3. Hans Gersbach & Armin Schmutzler, 1999. "Endogenous Spillovers and Incentives to Innovate," SOI - Working Papers 9902, Socioeconomic Institute - University of Zurich.
  4. Joanna Poyago-Theotoky, 1999. "A Note on Endogenous Spillovers in a Non-Tournament R & D Duopoly," Review of Industrial Organization, Springer, vol. 15(3), pages 253-262, November.
  5. Rebecca Henderson & Iain Cockburn, . "Scale, Scope and Spillovers: The Determinants of Research Productivity in Drug Discovery," Working Papers ec25/94, Department of Economics, University of Lancaster.
  6. J·n Z·bojnÌk, 2002. "A Theory of Trade Secrets in Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 831-855, August.
  7. William Kerr & Edward Glaeser & Glenn Ellison, 2007. "What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns," Working Papers 07-13, Center for Economic Studies, U.S. Census Bureau.
  8. De Bondt, Raymond, 1997. "Spillovers and innovative activities," International Journal of Industrial Organization, Elsevier, vol. 15(1), pages 1-28, February.
  9. Ricardo J. Caballero & Adam B. Jaffe, 1993. "How High are the Giants' Shoulders: An Empirical Assessment of Knowledge Spillovers and Creative Destruction in a Model of Economic Growth," NBER Working Papers 4370, National Bureau of Economic Research, Inc.
  10. Jiri Strelicky & Kresimir Zigic, 2011. "Intellectual Property Rights Protection and Enforcement in a Software Duopoly," CERGE-EI Working Papers wp435, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  11. Gamal Atallah, 2004. "The Protection of Innovations," CIRANO Working Papers 2004s-02, CIRANO.
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Cited by:
  1. Federico Etro, 2014. "Some thoughts on the Sutton approach," Journal of Economics, Springer, vol. 112(2), pages 99-113, June.

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