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Direct and indirect subsidies in markets with system goods in the presence of externalities. Preliminary version

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  • Slivko, Olga

Abstract

This paper derives a model of markets with system goods and two technological standards. An established standard incurs lower unit production costs but causes a negative externality. The paper derives the conditions for policy intervention and compares the effect of direct and indirect cost-reducing subsidies in two markets with system goods in the presence of externalities. If consumers are committed to the technology by purchasing one of the components, direct subsidies are preferable. For a medium-low cost difference between technological standards and a low externality cost it is optimal to provide a direct subsidy only to the first technology adopter. As the higher the externality cost raises, the more technology adopters should be provided with direct subsidies. This effect is robust in all extensions. In the absence of consumers commitment to a technological standard indirect and direct subsidies are both desirable. In this case, the subsidy to the first adopter is lower then the subsidy to the second adopter. Moreover, for the low cost difference between technological standards and low externality cost the fi rst fi rm chooses a superior standard without policy intervention. Finally, a perfect compatibility between components based on different technological standards enhances an advantage of indirect subsidies for medium-high externality cost and cost difference between technological standards. Journal of Economic Literature Classi fication Numbers: C72, D21, D40, H23, L13, L22, L51, O25, O33, O38. Keywords: Technological standards; complementary products; externalities; cost-reducing subsidies; compatibility.

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Bibliographic Info

Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/211631.

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Date of creation: 2012
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Handle: RePEc:urv:wpaper:2072/211631

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Keywords: Externalitats (Economia); Jocs no-cooperatius (Matemàtica); Conducta organitzacional; Mercats; Oligopolis; Organització industrial; Regulació del mercat; Política industrial; Progrès tecnològic; Política i govern; 33 - Economia;

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  1. Adam Copeland & Adam Hale Shapiro, 2010. "The Impact of Competition on Technology Adoption: An Apples-to-PCs Analysis," BEA Working Papers, Bureau of Economic Analysis 0063, Bureau of Economic Analysis.
  2. Katz, Michael L & Shapiro, Carl, 1986. "Product Compatibility Choice in a Market with Technological Progress," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 146-65, Suppl. No.
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  7. 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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  12. Emmanuel Petrakis & Joanna Poyago-Theotoky,, . "Environmental Impact of Technology Policy: R&D Subsidies Versus R&D Cooperation," Discussion Papers 97/16, University of Nottingham, School of Economics.
  13. Clements, Matthew T., 2004. "Direct and indirect network effects: are they equivalent?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(5), pages 633-645, May.
  14. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  15. Regibeau, Pierre & Rockett, Katherine E., 1996. "The timing of product introduction and the credibility of compatibility decisions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 14(6), pages 801-823, October.
  16. Rennings, Klaus & Rexhäuser, Sascha, 2010. "Long-term impacts of environmental policy and eco-innovative activities of firms," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 10-074, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  17. Eirik Gaard Kristiansen, 1998. "R&D in the Presence of Network Externalities: Timing and Compatibility," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 531-547, Autumn.
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