Discussion Paper

No. 2015-49 | July 10, 2015
Intra-Sector and Inter-Sector Competition in a Model of Growth

Abstract

The role of patents is threefold: first, they are important to state the property rights of an invention; second, they are necessary to secure financing for starting a new venture; third, they are fundamental to recoup R&D investments. The main difficulty in preventing unauthorized use of an innovation is in the establishment of ranges and contexts of patents applicability. Noting the imperfections of the patent legal system, the authors are in a position to consider an economy with two levels of competition under different market structures: the inter-sector monopolistic competition and the intra-sector Cournot oligopoly. The explicit consideration of strategic interactions in a model of endogenous growth produces interesting results. Considering the sectorial market share as the indicator of patent system enforcement, the authors find that growth takes place, if and only if, there are some property rights of private knowledge produced by R&D activities. In turn, the patent system translates into a low degree of competition among firms. Its influence on the growth rate goes in a single unambiguous direction. As competition rises, few resources are available for R&D, so the growth rate goes down.

JEL Classification:

E10, L13, L16, O31, O40

Assessment

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Links

Cite As

Marco Di Cintio and Emanuele Grassi (2015). Intra-Sector and Inter-Sector Competition in a Model of Growth. Economics Discussion Papers, No 2015-49, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2015-49


Comments and Questions


Anonymous - quality of the article
July 11, 2015 - 10:54

very nice.


Anonymous - Referee Report 1
July 15, 2015 - 09:22

See attached file


Anonymous - Referee Report 2
July 15, 2015 - 09:23

See attached file


John Seater - Connection to the literature
September 04, 2015 - 03:24

This paper has a serious problem of being literally 15 years behind the literature. The authors need to read and digest a considerable amount of literature that they overlook or ignore in this paper. Their references to growth theory are restricted to a few papers in the 1st generation ...[more]

... of growth theory, which is the work of Romer, Grossman and Helpman, Aghion and Howitt, and derivatives of those. They completely ignore the large body of work that has developed and continues to develop since then.

All of the 1st generation growth models are deficient in that the industrial structure underlying the models is inadequate and leads to implications that have been soundly rejected by formal tests. Two examples are the well-known aggregate scale effect (the implication that the growth rate is positively related to the size of the economy) and the strong negative sensitivity of growth rates to tax rates. The models simply don't pass scientific muster.

The 2nd generation of endogenous growth theory, started by Peretto (1996, 1998, 1999)), Dinopoulos and Thompson (1998), and Howitt (1999) fix the problems of the 1st generation models by fixing the underlying IO structure of the models. The key element is to eliminate the market size effect present in the 1st generation models. Both Dinopoulos & Thompson and Howitt had elimination of the scale effect in mind when they constructed their models, but Peretto did not. Peretto's interest was to start from proper IO foundations and build a model of IO in general equilibrium that provided a coherent micro-based theory of research and development and through that a theory of economic growth. He succeeded in doing that and provided deep micro foundations for endogenous growth theory. Along the way, he addressed many of the questions raised by this paper. Unsurprisingly, this paper does things a little differently than Peretto (independent researchers almost never produce exactly the same paper), but much of what this paper does has been anticipated by the 2nd generation growth literature. Laincz, for example, addresses Cournot competition.

The authors may have something useful to say. There is not a lot of work on growth theory based on Cournot competition, but there is some. The authors need to bone up on the literature and then compare their work to what already exists. At that point they can decide if they still have something useful to say. If they do (and they may), they also will be in a strong position to convince the rest of us that their work provides an advance.