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Managing spillovers: an endogenous sunk cost approach
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SYSNO ASEP 0384391 Document Type V - Research Report R&D Document Type O - Ostatní Title Managing spillovers: an endogenous sunk cost approach Author(s) Senyuta, O. (UA)
Žigić, Krešimir (NHU-C) RID, ORCIDIssue data Prague: CERGE-EI, 2012 ISSN 1211-3298 Series CERGE-EI Working Paper Series Series number 472 Number of pages 42 s. Publication form Print - P Language eng - English Country CZ - Czech Republic Keywords endogenous sunk costs ; knowledge spillovers ; innovations Subject RIV AH - Economics R&D Projects GAP402/12/0961 GA ČR - Czech Science Foundation (CSF) Institutional support NHU-C - PRVOUK-P23 Annotation 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. Workplace NHU-C Contact Tomáš Pavela, pavela@cerge-ei.cz, Tel.: 224 005 122 Year of Publishing 2014 Electronic address http://www.cerge-ei.cz/pdf/wp/Wp472.pdf
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