Environmental Innovation under Cournot Competition
CORE Discussion Paper No. 2007/50
28 Pages Posted: 30 Aug 2007
Date Written: June 28, 2007
Abstract
In this paper, we address the incentives to invest in environmental innovation of enterprises that exercise market power in the output market and also buy and sell pollution permits. Differently from the existing literature, using a market approach we explicitly model the interaction between the output market, where firms play à la Cournot, and the permits market. We find that, in the new equilibrium firms behave symmetrically, that is, they either both innovate to protect their market share in the output market or they both choose not to innovate. Whether the innovation equilibrium arises or not depends on the output demand and on the productivity enhancement and not on the distribution of permits among firms. Finally, we show that, under this market conguration, collusion can be welfare enhancing.
Keywords: environmental innovation, tradable permits, interaction à la Cournot
JEL Classification: D43, L13, Q55
Suggested Citation: Suggested Citation
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