0384391 - NHU-C 2014 RIV CZ eng V - Research Report
Senyuta, O. - Žigić, Krešimir
Managing spillovers: an endogenous sunk cost approach.
Prague: CERGE-EI, 2012. 42 s. CERGE-EI Working Paper Series, 472. ISSN 1211-3298
R&D Projects: GA ČR(CZ) GAP402/12/0961
Institutional support: PRVOUK-P23
Keywords : endogenous sunk costs * knowledge spillovers * innovations
Subject RIV: AH - Economics
http://www.cerge-ei.cz/pdf/wp/Wp472.pdf

We introduce spillover effect into John Sutton.s (1991,1998) concept of endogenous sunk costs. These sunk costs appear in the form of R&D investment into quality in our framework. We show that with spillovers increasing and the effectiveness of investment in raising quality decreasing, the Sutton lower bound on concentration for an industry decreases and ultimately collapses to zero when spillovers are large enough and/or effectiveness of investment in raising quality is low enough. In the second part, we allow firms to protect their investment against spillovers. We focus on symmetric pure strategy Nash equilibria, where all firms either protect their investment or do not protect at all. Contrary to the result with exogenous spillovers assumed in the first part, in the second part of the paper we show that higher ex ante spillovers and/or lower effectiveness of investment in raising quality may induce firms to protect themselves against spillovers, leading to higher investment in quality, and to more concentrated market structure. Thus, the Sutton’s result on the concentration bound is preserved, if we allow firms to manage spillovers via private protection.
Permanent Link: http://hdl.handle.net/11104/0214063