Knowledge Spillovers, Mergers and Public Policy in Economic Clusters

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Knowledge Spillovers, Mergers and Public Policy in Economic Clusters

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George Norman
Lynne Pepall

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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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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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Article
- George Norman & Lynne Pepall, 2004. "Knowledge Spillovers, Mergers and Public Policy in Economic Clusters," Review of Industrial Organization, Springer, vol. 25(2), pages 155-174, 06. [Downloadable!] (restricted)

Find related papers by JEL classification:
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
O38 - Economic Development, Technological Change, and Growth - - Technological Change - - - Government Policy

This paper has been announced in the following NEP Reports:

NEP-URE-2002-10-18 (Urban & Real Estate Economics)

References listed on IDEAS
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Other versions:
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Other versions:
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