Managing Spillovers: An Endogenous Sunk Cost Approach

Olena Senyuta and Kresimir Zigic ()

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We introduce spillover e¤ect 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 decreas- ing, 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.

Keywords: endogenous sunk costs; knowledge spillovers; R&D, inno- vations; market concentration (search for similar items in EconPapers)
JEL-codes: L13 O30 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-bec, nep-com and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Managing spillovers: An endogenous sunk cost approach (2016)
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