Technology and Antitrust Policies in a Polluting Industry

We compare different combinations of technology and antitrust policies from a social welfare point of view in a non-tournament model of cost reducing R&D with spillovers, for the case of a homogeneous goods duopoly, where production produces pollution as a by-product, firms face an exogenous emissions tax and can also invest in abatement technologies. We show that for sufficiently polluting industries facing a loose environmental policy, cooperative R&D is not always welfare improving; a policy of subsidizing cooperative R&D is always welfare improving; allowing for mergers may be socially desirable; not regulating the industry at all may be welfare superior to a policy consisting of forbidding market collusion and subsidizing cooperative R&D.