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Knowledge Spillovers, Mergers and Public Policy in Economic Clusters

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  • George Norman
  • Lynne Pepall

Abstract

This paper investigates how market concentration affects research activity in an economic cluster. The firms in the cluster play a two-stage game. In the first stage the firms choose whether or not to engage in costly research that generates technological improvements that spill over to the other firms in the cluster. The more firms engaged in research the richer or more profitable is the pool of knowledge that spills over. In the second stage after the knowledge spillovers have occurred, firms compete in quantities. We solve for the symmetric mixed strategy equilibrium to the first stage of the game, and find that too low a degree of concentration in the cluster will destroy firms’ incentives to undertake research and so the cluster stagnates. We then explore whether a merger by increasing concentration can stimulate research activity in the cluster. Finally, we consider a public policy response to stagnation and compare whether a direct public subsidy to stimulate research is preferable to a self-financing arrangement.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0215.

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Date of creation: 2002
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Handle: RePEc:tuf:tuftec:0215

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Keywords: agglomeration; research; perfect spillovers; mergers;

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  1. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December.
  2. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-21, January.
  3. Duranton, Gilles & Puga, Diego, 2003. "Microfoundations of Urban Agglomeration Economies," CEPR Discussion Papers 4062, C.E.P.R. Discussion Papers.
  4. Irwin Feller, 1993. "What agricultural extension has to offer as a model for manufacturing modernization," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(3), pages 574-581.
  5. Dybvig, Philip H. & Spatt, Chester S., 1983. "Adoption externalities as public goods," Journal of Public Economics, Elsevier, vol. 20(2), pages 231-247, March.
  6. Cabral, Luis M. B., 2000. "R&D cooperation and product market competition," International Journal of Industrial Organization, Elsevier, vol. 18(7), pages 1033-1047, October.
  7. Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Hugo Sonnenschein, 1968. "The Dual of Duopoly Is Complementary Monopoly: or, Two of Cournot's Theories Are One," Journal of Political Economy, University of Chicago Press, vol. 76, pages 316.
  9. Morton I. Kamien & Israel Zang, 1988. "The Limits of Monopolization Through Acquisition," Discussion Papers 802, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. D Leahy & J.P. Neary, 1995. "Public Policy Towards R&D in Oligopolistic Industries," CEP Discussion Papers dp0270, Centre for Economic Performance, LSE.
  11. Kesteloot, Katrien & Veugelers, Reinhilde, 1995. "Stable R&D Cooperation with Spillovers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 651-72, Winter.
  12. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  13. De Bondt, Raymond & Veugelers, Reinhilde, 1991. "Strategic investment with spillovers," European Journal of Political Economy, Elsevier, vol. 7(3), pages 345-366, October.
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Cited by:
  1. Chia-Lin Chang & Michael McAleer, . "International Technology Diffusion of Joint and Cross-border Patents," Tinbergen Institute Discussion Papers 13-098/III, Tinbergen Institute.
  2. Chia-Lin Chang & Michael McAleer & Ju-Ting Tang, 2013. "International Technology Diffusion of Joint and Cross-border Patents," Working Papers in Economics 13/24, University of Canterbury, Department of Economics and Finance.

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