Knowledge Transfer, Transitional Dynamics and Optimal Research & Development Policy in a Dynamic Monopoly Setting

Jürgen Antony and Torben Klarl

Review of Industrial Organization, 2020, vol. 57, issue 3, No 5, 579-606

Abstract: Abstract This paper focuses on the question of whether or not a reduction of the knowledge barrier is good for welfare. Based on a dynamic monopoly setting with simultaneous investment decisions in process as well as in product Research & Development (R&D), we show that a reduction of the knowledge barrier has ambiguous welfare consequences: due to a lower knowledge barrier, product quality and welfare increase in the short-run. However, this may not necessarily be the case in the long-run. One reason is that a positive long-lasting knowledge barrier shock triggers the monopolist sub-optimally to reduce its product R&D investments today and in the future at the cost of future product quality. This in turn may reduce welfare. Accordingly, to realize the first-best level of product quality, the long-run optimal R&D subsidy rate for product innovations increases with a reduction of the knowledge barrier.

Keywords: Process and product innovation; Learning by doing; Knowledge spillovers; Optimal taxation; Dynamic monopoly analysis (search for similar items in EconPapers)
JEL-codes: C4 D4 D6 D9 L1 O3 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11151-020-09779-7

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