Knowledge Spillovers, Mergers and Public Policy in Economic Clusters

George Norman () and Lynne Pepall

No 215, Discussion Papers Series, Department of Economics, Tufts University from Department of Economics, Tufts University

Abstract: This paper investigates how market concentration affects research activity in an economic cluster. The firms in the cluster play a two-stage game. In the first stage the firms choose whether or not to engage in costly research that generates technological improvements that spill over to the other firms in the cluster. The more firms engaged in research the richer or more profitable is the pool of knowledge that spills over. In the second stage after the knowledge spillovers have occurred, firms compete in quantities. We solve for the symmetric mixed strategy equilibrium to the first stage of the game, and find that too low a degree of concentration in the cluster will destroy firms’ incentives to undertake research and so the cluster stagnates. We then explore whether a merger by increasing concentration can stimulate research activity in the cluster. Finally, we consider a public policy response to stagnation and compare whether a direct public subsidy to stimulate research is preferable to a self-financing arrangement.

Keywords: agglomeration; research; perfect spillovers; mergers (search for similar items in EconPapers)
JEL-codes: L10 O38 (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-ure
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Journal Article: Knowledge Spillovers, Mergers and Public Policy in Economic Clusters (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:tuf:tuftec:0215

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