Cecilia Vergari

Incentives to innovate in oligopolies

In the spirit of Arrow (The Rate and Direction of Inventive Activity, Princeton, NJ, Princeton University Press, 1962), we examine, in an oligopoly model with horizontally differentiated products, how much a firm is willing to pay for a process innovation that it would be the only one to use. We show that different measures of competition (number of firms, degree of product differentiation, Cournot vs. Bertrand) affect incentives to innovate in non-monotonic, different and potentially opposite ways.

Turning Piracy into Profits: a Theoretical Investigation

We analyse how the presence of a (private, small-scale) file-sharing community affects the profitability of producers of digital goods within a spatial duopoly model a la Hotelling (1929). Consumers can download pirated content by joining this file-sharing network. To gain access to the community, consumers have to buy and share a digital good with other members. We show that firms benefit from piracy in emerging markets, that is, markets that are not fully covered. The activity of file-sharing, in fact, allows firms to reach a larger share of customers who otherwise would not buy at all. This effect is missing in mature and widespread markets where firms prefer to be protected from piracy. Our results provide a rationale for the observation that in emerging countries, companies are unlikely to take a firm stance against piracy.

Herd behaviour, strategic complementarities and technology adoption

In technology adoption, herd behaviour can lead to a suboptimal outcome. An example is given by Choi (1997): it is a model of technology choice under uncertainty where herding arises because of strategic complementarities and risk aversion. It causes a positive experimenting bias against the adoption of a more efficient (in terms of expected value) technology. We introduce in his model an additional element upon which firms base their technology decision: the economic environment. We investigate how this additional source of uncertainty can affect herding and so the efficiency of the technology choice. The result is that, under certain conditions, the experimenting bias decreases and in the limit it is possible to induce firms to experiment with the new technology thus improving social welfare.

Environmental vs hedonic quality: which policy can help in lowering pollution emissions?

In this paper we compare two policy instruments that can be adopted to curb carbon emissions. The first is a conventional pollution tax, the second is an environmental campaign raising consumers’ awareness about the relative impact of their consumption choices. The comparison is carried out in two different scenarios, depending on whether consumers’ aprioristic preferences are such that they value the environmental attribute of a product ( environmental quality ) or its pure performance ( hedonic quality ) . In the case of environmental quality, the campaign is preferred under some specific conditions based on consumer heterogeneity, cost-effective analysis, and pollution level. On the contrary, the pollution tax is always preferred in the case of hedonic quality. Therefore, we show that the relative efficiency of the two policy instruments crucially depends on consumers’ initial concern for the environment, which may vary across countries due to socio-economic conditions.

Revealing Incentives for Compatibility Provision in Vertically Differentiated Network Industries

Abstract: We determine the incentives for compatibility provision of firms that produce network goods with different intrinsic qualities. We consider the case in which both firms have the power to veto compatibility and the case in which none has this power. We obtain that if consumers have a strong preference for the network, there are multiple equilibria in pricing and consumer decisions. We show that in some equilibria, it is the high quality firm that invests in compatibility, whereas in others, the low quality fi rm triggers compatibility. The socially optimal compatibility level is zero, except under strong network effects, where one of the equilibria has all consumers buying the low quality good. In this case, a partial level of compatibility is optimal. Comparison between the privately and the socially optimal levels of compatibility depends on whether or not rms have veto power over compatibility.

Vertical Integration Smooths Innovation Diffusion

Abstract Does vertical integration of an input innovator with a downstream firm entail innovation foreclosure? We study the licensing incentives of an independent input producer owning a patented product innovation which allows the downstream firms to improve the quality of their final goods. We consider two-part tariff contracts for both outside and incumbent innovators. We find that the incumbent innovator has always the incentive to license its innovation to the rival firm so that under vertical integration complete technology diffusion takes place. In contrast, the external patent holder may prefer exclusive licensing depending on the innovation size as well as on the set of allowed contracts. As a result vertical integration does not entail innovation foreclosure, rather it facilitates innovation diffusion with respect to vertical separation. As for the profitability, the vertical integration with either downstream firm is always privately profitable and it is welfare improving for large innovations: this implies that not all profitable mergers should be rejected.

Revealing incentives for vertical integration in the presence of glocal policies

Local and regional policy makers are acquiring an increasingly active role in affecting firms’ specialization decisions that in turn influence firms’ vertical organization. We analyse the relation between vertical integration incentives and trade liberalization in the presence of glocal policies, i.e., specific (local) policies that have international (global) impact. More precisely, one of the most important reasons for vertical integration in the presence of sunk costs of specialization is avoiding the risk of hold up. We introduce the idea that this sunk cost can be manipulated by the policy maker at national/regional/local level. We characterize the conditions under which policies are effective in achieving a particular equilibrium in terms of vertical structure and specialization decision. The main result is that the policy effectiveness is stronger the higher is the importance of the hold-up problem. In particular, we investigate how glocal policies interact with policies that affect the market openness (trade policy). We find that for high values of the specialization upgrade cost, trade policies are ineffective. At the same time, if the trading cost is very low, glocal policies are ineffective. Finally, in the presence of intermediate specialization upgrade and trading cost, either policy supplements the other policy.

Product innovation in a vertically differentiated model

We study the licensing incentives of an independent input producer owning a patented product innovation which allows the downstream firms to improve the quality of their final goods. We consider a general two-part tariff contract for both outside and incumbent innovators. We find that technology diffusion critically depends on the nature of market competition (Cournot vs. Bertrand). Moreover, the vertical merger with either downstream firm is always privately profitable and it is welfare improving for large innovations: this implies that not all profitable mergers should be rejected.

A Note on Acquisition of Complements in a Vertically Differentiated Market

This note is concerned with the effects of joint ownership of complements when they are vertically differentiated. We provide strong arguments for the positive nature of network integration among firms, while showing at the same time that, in some circumstances, anti-competitive consequences can be observed under acquisition.

Pitfalls in Vertical Arrangements

A popular way of obtaining essential inputs requires the establishment of an input production joint venture (IPJV) in the upstream (U) section of the vertical chain of production by firms competing and selling final goods in the downstream (D) section of the vertical chain. In spite of the apparently simple arrangement there are many possible governances for the management of the IPJV according to the ownership structure and to the degree of delegation granted to the IPJV by parent firms. We explore the best sustainable governance arrangement for the IPJV. We address this question in a duopoly framwork and we find a large area of impossible vertical arrangements associated with technological asymmtery. The most likely governance of the vertical arrangment associated to the IPJV is total independence.