Competition and Growth in Neo-Schumpeterian Models

We study the effect of product market competition on the incentives to innovate and the economy’s rate of growth in an endogenous growth model. We extend previous works in industrial organization by assuming that innovation is sequential and cumulative, and early endogenous growth models by accounting for the possibility that in each period many asymmetric firms (i.e., an endogenously determined number of successive innovators) are simultaneously active. We identify the price effect, the front loading of profits, and the productive efficiency effect associated with an increase in competitive pressure. The price effect reduces the incentives to innovate, but both the front loading of profits and the productive efficiency effect raise the incentives to innovate. We demonstrate circumstances in which the productive efficiency effect dominates the price effect. In these circumstances, the front loading of profits and the fact that the productive efficiency effect dominates the price effect compound to make the equilibrium rate of growth increase with the intensity of competition.

Leadership Cycles

We study a quality-ladder model of endogenous growth that produces stochastic leadership cycles. Over a cycle, industry leaders can innovate several successive times in the same industry, gradually increasing the magnitude of their technological lead before being replaced by a new en-trant. Initially, new leaders are eager to enlarge their lead and do much of the research, but if they innovate repeatedly, their propensity to invest in R&D decreases. Eventually they stop doing research ltogether, and as they are overtaken a new cycle starts. The model generates a skewed firm size distribution and a deviation from Gibrat's law that accord with the empirical evidence. We also consider various policy measures, showing that in some cases policy should favour R&D by incumbents, not outsiders, and that stronger patent protection may reduce innovation and growth.

Vertical integration and product innovation

We study vertical integration and product innovation (in the form of horizontal product differentiation) as interdependent strategic choices of vertically related firms. We consider product innovation in the downstream market as a strategic decision of innovative firms facing a threat of vertical integration and market foreclosure by an upstream monopolist. Our main finding is that, although product differentiation allows to soften product market competition and to avoid market foreclosure, the downstream market may prefer less product differentiation to deter vertical integration. Therefore, less product innovation can be a possible social cost of a lenient antitrust policy.Vertical Integration; product innovation; market foreclosure; duopoly

Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network

The paper studies the regulatory design in an industry where the regulated downstream provider of services to final consumers purchases the necessary inputs from an upstream supplier. The model is closely inspired by the UK regulatory mechanism for the railway network. Its philosophy is one of vertical separation between ownership and operation of the rolling stock: the Train Operating Company (TOC) leases from a ROlling Stock COmpany (ROSCO) the trains it uses in its franchise. This, we show, increases the flexibility and competitiveness of the network. On the other hand, it also reduces the specificity of the rolling stock, thus increasing the cost of running the service, and the TOC’s incentive to exert quality enhancing effort, thus reducing the utility of the final users. Our simple model shows that the UK regime of separation may in fact be preferable from a welfare viewpoint.Network regulation; Railways; Incomplete contracts; Relation specific investment

Essays on competition, innovation and growth

The thesis collects four essays in the fields of competition and innovation economics. In chapter 1, we review the recent growth literature that analyses the effects of product market competition on growth. Contrary to the negative effect predicted by the early endogenous growth models, this literature emphasises that product market competition may foster innovation and growth. We argue that a common characteristic of this literature is a decrease in the intensity of technological competition relative to the early models, which seems to support the positive link between product market competition and growth. In chapter 2, we study the effect of product market competition on growth in an endogenous growth model that maintains the intensity of R&D competition of the early models. We extend the early models by accounting for the possibility that many asymmetric firms (i.e. successive innovators) are simultaneously active in each industry. We show that an increase in competitive pressure exerts two positive effects on the incentive to innovate, which contrast the negative effect due to lower prices: the productive efficiency effect and the front loading of profits. We demonstrate circumstances in which the productive efficiency effect dominates the price effect, leading to a positive link between competition and growth. In chapter 3, we reconsider the comparison between Bertrand and Cournot competition in a differentiated duopoly with asymmetric costs. Our main finding is that, with high degrees of cost asymmetry and/or low degrees of product differentiation, the efficient firm’s and the industry profits are higher under Bertrand competition. This contrasts with Singh and Vives (1984) seminal result that, with substitute goods, equilibrium profits are always higher with Cournot competition. In chapter 4, we study vertical integration and product innovation as interdependent strategic choices of vertically related firms. Our main finding is that, although product differentiation allows to soften product market competition and to avoid market foreclosure, the downstream market may prefer less product differentiation to prevent vertical integration. Therefore, less product innovation can be a possible social cost of a lenient antitrust policy

Essays on competition, innovation and growth

The thesis collects four essays in the fields of competition and innovation economics. In chapter 1, we review the recent growth literature that analyses the effects of product market competition on growth. Contrary to the negative effect predicted by the early endogenous growth models, this literature emphasises that product market competition may foster innovation and growth. We argue that a common characteristic of this literature is a decrease in the intensity of technological competition relative to the early models, which seems to support the positive link between product market competition and growth. In chapter 2, we study the effect of product market competition on growth in an endogenous growth model that maintains the intensity of R&D competition of the early models. We extend the early models by accounting for the possibility that many asymmetric firms (i.e. successive innovators) are simultaneously active in each industry. We show that an increase in competitive pressure exerts two positive effects on the incentive to innovate, which contrast the negative effect due to lower prices: the productive efficiency effect and the front loading of profits. We demonstrate circumstances in which the productive efficiency effect dominates the price effect, leading to a positive link between competition and growth. In chapter 3, we reconsider the comparison between Bertrand and Cournot competition in a differentiated duopoly with asymmetric costs. Our main finding is that, with high degrees of cost asymmetry and/or low degrees of product differentiation, the efficient firm’s and the industry profits are higher under Bertrand competition. This contrasts with Singh and Vives (1984) seminal result that, with substitute goods, equilibrium profits are always higher with Cournot competition. In chapter 4, we study vertical integration and product innovation as interdependent strategic choices of vertically related firms. Our main finding is that, although product differentiation allows to soften product market competition and to avoid market foreclosure, the downstream market may prefer less product differentiation to prevent vertical integration. Therefore, less product innovation can be a possible social cost of a lenient antitrust policy

Vertical integration and product differentiation

We study a new channel of downstream rent extraction through vertical integration: competition for integration. Innovative downstream firms create value and profit opportunities through product differentiation, which however affects an upstream monopolist’s incentive to vertically integrate. By playing the downstream firms against each other for integration, the upstream firm can extract even more than the additional profits generated by the downstream firms’ differentiation activities. To preempt rent extraction, the downstream firms may then reduce differentiation, which reduces social welfare. We show that this social cost of vertical integration is more likely to arise in innovative and competitive industries, and that the competition for integration channel of downstream rent extraction is robust to upstream competition

Patent protection for complex technologies

We analyse patent protection with sequential and complementary innovation. We argue that in these cases the classic Nordhaus trade-off between innovation and static monopoly distortions is different from the case of isolated innovations. We parametrize the degree of innovation sequentiality and complementarity and show that the optimal level of paten protection increases with both. We also address the issue of the optimal division of profit among different innovation

Leadership Cycles

We study a quality-ladder model of endogenous growth that produces stochastic leadership cycles. Over a cycle, industry leaders can innovate several successive times in the same industry, gradually increasing the magnitude of their technological lead before being replaced by a new entrant. Initially, new leaders are eager to enlarge their lead and do much of the research, but if they innovate repeatedly, their propensity to invest in R&D decreases. Eventually they stop doing research altogether, and as they are overtaken a new cycle starts. The model generates a skewed firm size distribution and a deviation from Gibrat’s law that accord with the empirical evidence. We also consider various policy measures, showing that in some cases policy should favour R&D by incumbents, not outsiders, and that stronger patent protection may reduce innovation and growth