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Environmental innovation under Cournot competition

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  • SANIN, Maria Eugenia
  • ZANAJ, Skerdilajda

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

Abstract

In this paper, we address the incentives to invest in environmental innovation of enterprises that exercise market power in the output market and also buy and sell pollution permits. Differently from the existing literature, using a market approach we explicitly model the interaction between the output market, where firms play A la Cournot, and the permits market. We find that, in the new equilibrium firms behave symmetrically, that is, they either both innovate to protect their market share in the output market or they both choose not to innovate. Whether the innovation equilibrium arises or not depends on the output demand and on the productivity enhancement and not on the distribution of permits among firms. Finally, we show that, under this market configuration, collusion can be welfare enhancing

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007050.

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Date of creation: 01 Jul 2007
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Handle: RePEc:cor:louvco:2007050

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Keywords: environmental innovation; tradable permits; interaction à la Cournot;

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References

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  1. GABSZEWICZ, Jean J. & ZANAJ, Skerdilajda, 2006. "Competition in successive markets : entry and mergers," CORE Discussion Papers 2006097, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
  3. Dafna Eshel, 2005. "Optimal Allocation of Tradable Pollution Rights and Market Structures," Journal of Regulatory Economics, Springer, vol. 28(2), pages 205-223, 09.
  4. Bréchet, Thierry & Jouvet, Pierre-André, 2008. "Environmental innovation and the cost of pollution abatement revisited," Ecological Economics, Elsevier, vol. 65(2), pages 262-265, April.
  5. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
  6. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
  8. GABSZEWICZ, Jean J. & GARELLA, Paolo G., 1995. ""Buy it or make it Yourself ?" A Paradox," CORE Discussion Papers 1995014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Gaudet, G. & Salant, S.W., 1988. "Uniqueness Of Cournot Equilibrium: New Results From Old Methods," Cahiers de recherche 8818, Université Laval - Département d'économique.
  10. Parry, Ian, 1997. "Pollution Regulation and the Efficiency Gains from Technological Innovation," Discussion Papers dp-98-04, Resources For the Future.
  11. Jean j., GABSZEWICZ & Skerdilajda, ZANAJ, 2006. "Upstream market foreclosure," Discussion Papers (ECON - Département des Sciences Economiques) 2006024, Université catholique de Louvain, Département des Sciences Economiques.
  12. Requate, Till, 1998. "Incentives to innovate under emission taxes and tradeable permits," European Journal of Political Economy, Elsevier, vol. 14(1), pages 139-165, February.
  13. SANIN, Maria Eugenia, 2006. "Market design in wholesale electricity markets," CORE Discussion Papers 2006100, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. BRECHET, Thierry & JOUVET, Pierre-André, 2006. "Environmental innovation and the cost of pollution abatement," CORE Discussion Papers 2006040, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Montero, Juan-Pablo, 2002. "Permits, Standards, and Technology Innovation," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 23-44, July.
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