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Persistence of Monopoly, Innovation, and R-and-D Spillovers: Static versus Dynamic Analysis

  • Kresimir Zigic

    (CERGE-EI)

  • Viatcheslav Vinogradov

    (CERGE-EI)

  • Eugen Kovac

    (CERGE-EI)

We build a dynamic duopoly model that accounts for the empirical observation of monopoly persistence in the long run. More specifically, we analyze the conditions under which it is optimal for the market leader in an initially duopoly setup to undertake pre-emptive R&D investment, ("strategic predation" strategy) that eventually leads to exit of the follower firm. The follower is assumed to benefit from the innovative activities of the leader through R&D spillovers. The novel feature of our approach is that we introduce explicit dynamic model and contrast it with its static counterpart. Contrary to the predictions of the static model, strategic predation that leads to persistence of monopoly is in general optimal strategy to pursue in a dynamic framework when spillovers are not large

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 516.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:516
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  1. Gual, Jordi & Hellwig, Martin F. & Perrot, Anne & Polo, Michele & Rey, Patrick & Schmidt, Klaus M. & Stenbacka, Rune, 2005. "An Economic Approach to Article 82," Discussion Papers in Economics 745, University of Munich, Department of Economics.
  2. Wendy Carlin & Mark Schaffer & Paul Seabright, 2004. "A Minimum of Rivalry: Evidence from Transition Economies on the Importance of Competition for Innovation and Growth," CERT Discussion Papers 0402, Centre for Economic Reform and Transformation, Heriot Watt University.
  3. Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, vol. 114(495), pages 281-303, 04.
  4. McGee, John S, 1980. "Predatory Pricing Revisited," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 289-330, October.
  5. Zvi Griliches, 1991. "The Search for R&D Spillovers," NBER Working Papers 3768, National Bureau of Economic Research, Inc.
  6. Zigic, Kresimir, 1998. "Intellectual property rights violations and spillovers in North-South trade," European Economic Review, Elsevier, vol. 42(9), pages 1779-1799, November.
  7. Blundell, Richard & Griffith, Rachel & van Reenen, John, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 529-54, July.
  8. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-96, September.
  9. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  10. Fershtman, Chaim & Kamien, Morton I, 1987. "Dynamic Duopolistic Competition with Sticky Prices," Econometrica, Econometric Society, vol. 55(5), pages 1151-64, September.
  11. d'ASPREMONT, Claude & JACQUEMIN, Alexis, . "Cooperative and noncooperative R&D in duopoly with spillovers," CORE Discussion Papers RP 823, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Zigic, Kresimir, 2000. "Strategic trade policy, intellectual property rights protection, and North-South trade," Journal of Development Economics, Elsevier, vol. 61(1), pages 27-60, February.
  13. Federico Etro, 2006. "Aggressive leaders," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 146-154, 03.
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