LECTURE 3

Which are the characteristics of public goods

Non-excludable and non-rivalrous

2 Examples of input spillovers

Studying patents and hiring ex-employees

Examples of output spillovers

Product imitation, cumulative innovation and consumer surplus

Informal ways to increase appropaibility

Secrecy, first mover advantage (lead time) and complexity

Only public goods carry spillovers.

False

The consumption of a public good does not prevent its consumption by others.

True

Public goods are underprovided because they require large fixed investments.

False

It is difficult to prevent others from using a public good.

True

Consider a duopolistic market where firms i and j are active. Firm i faces a cost function of the form ci(xi,xj) = c - xi - B(xi) xj, and firm j faces the same by symmetry. Recall that x represents investment in R&D and B(.) is some increasing function.



Are the following statements true or false?



Statement A: the term B(xi)xj represents a knowledge spillover: the more firm j invests in R&D, the more cost-efficient firm i becomes.



Statement B: the term B(xi) represents the firm's absorptive capacity: the higher the firm's own R&D investment, the more it can benefit from incoming spillovers.

Statement A is True

Statement B is True

Which of the following are effective ways to build absorptive capacity?

Investing in an own R&D laboratory.

Sending company researchers to training sessions.

Expanding the R&D workforce by hiring young university graduates.

What is ‘appropriation’ in the context of innovation, and how does it affect firms?

Appropiation is the degree to which investors can capture the return of their investments. In the context of innovation, since knowledge is a public good, there can be spillovers so that third parties take part of the returns of the investment on innovation.

This makes private returns to R&D lower than the public ones, leading to an insufficient level of R&D investment that generates a deathweight loss.

What are R&D spillovers? How can they occur? How do they affect firm’s incentives to invest in R&D?

Valuable information that the firm fails to appropiate. They can come from inputs and outputs:

Inputs -> studying patents, hiring ex-employees
Outputs -> product imitation, cumulative innovation and consumer surplus

They drive down R&D returns and thus fimr's incentives to invest in R&D

Which strategies may firms implement to appropriate returns from their inventions?

IP rights

Informal ways:
Secrecy
Complexity
First-mover advantage

What do we mean with absorptive capacity?

A firm's ability to identify, assimilate and exploit knowledge coming from external sources.
R&D creates a positive internal externality -> the larger one firm's R&D investment, the greater profit it can make from other firms/institution's R&D

Thus, it increases the incentives to invest in R&D and limits appropriability problems.

How would you introduce spillovers and absorptive capacity in economic models of innovation?

xi accounts for firm i's R&D investment

Spillovers:
ci(xi,xj)=c-xi-bxj

Absorptive capacity:
ci(xi,xj)=c-xi-B(xi)xj with 0<B(xi)<1

Name 2 examples of formal and informal IP protection. Which tend to be more important for firms? Why?

Formal: patents and copytight
Informal: secrecy and lead time

Informal ways tend to be more important for firms because formal ways usually give the firm market power but in exchange they require the firm to make its knowledge public, so other competitors can usually imitate their innovations by changing some characteristics.