We examine the effect of more stringent environmental regulation on the dynamic structure of a deterministic competitive industry with endogenous entry and exit where firms invest in reduction of their future compliance cost. The level of regulation is exogenously fixed and constant over time. The compliance cost of a firm at each point of time depends on its current output, its accumulated past investment and the level of regulation. We outline sufficient conditions under which industries with more stringent regulation are associated with higher investment in compliance cost reduction and higher shake-out of firms over time; the opposite may be true under certain circumstances. Our analysis indicates that the effect of a change in regulation on market structure may be lagged over time.
Secrecy about investment in research and development (R&D) can promote greater technological change and higher social welfare in competitive industries. In a duopoly where each firm has private information about its actual production technology (or cost) and firms engage in cost-reducing R&D with uncertain outcomes prior to engaging in price competition, the equilibrium outcome when firms do not observe the R&D investment chosen by the rival (investment secrecy) yields higher investment, social welfare, and industry profit compared to the outcome when R&D investment levels of firms are publicly observable. Government intervention to secure disclosure of R&D investments may be counterproductive; trade secret laws that protect privacy of information related to R&D inputs or investment may be helpful.
Firms often invest resources in acquiring scientific evidence to evaluate the actual (more accurate) risk (i.e., the probability of occurrence) of any potential environmental hazards that might result from their own production processes and use this information in taking optimal preventive measures. In a symmetric duopoly where the acquired information about environmental risk is observed privately by the firms, I show that requiring firms to publicly report this information increases the strategic incentive of firms to invest in information acquisition. However, the net expected environmental damage of an investing firm is lower if there is no public disclosure.
We consider a market where firms (that compete in the product market) invest in the research and development (R&D) activities with no guaranteed success and engage in a patent race for intellectual property rights. We analyze the effects of a strategic (ex ante) licensing contract on the equilibrium investment behavior of competing firms that form a research and development (R&D) alliance to win a patent race. We show that the R&D alliance members that sign strategic licensing contract invest more in the R&D and earn higher expected profits compared to the firms in an R&D cartel and R&D joint venture cartel without any strategic licensing as well as the firms that aggressively compete in the innovation market to win the patent race.