Environmental Innovation under Cournot Competition

CORE Discussion Paper No. 2007/50

28 Pages Posted: 30 Aug 2007

See all articles by María Eugenia Sanin

María Eugenia Sanin

Université Paris Saclay

Skerdilajda Zanaj

Catholic University of Louvain - Center for Operations Research and Econometrics (CORE)

Date Written: June 28, 2007

Abstract

In this paper, we address the incentives to invest in environmental innovation of enterprises that exercise market power in the output market and also buy and sell pollution permits. Differently from the existing literature, using a market approach we explicitly model the interaction between the output market, where firms play à la Cournot, and the permits market. We find that, in the new equilibrium firms behave symmetrically, that is, they either both innovate to protect their market share in the output market or they both choose not to innovate. Whether the innovation equilibrium arises or not depends on the output demand and on the productivity enhancement and not on the distribution of permits among firms. Finally, we show that, under this market conguration, collusion can be welfare enhancing.

Keywords: environmental innovation, tradable permits, interaction à la Cournot

JEL Classification: D43, L13, Q55

Suggested Citation

Sanin, Maria Eugenia and Zanaj, Skerdilajda, Environmental Innovation under Cournot Competition (June 28, 2007). CORE Discussion Paper No. 2007/50, Available at SSRN: https://ssrn.com/abstract=1010636 or http://dx.doi.org/10.2139/ssrn.1010636

Maria Eugenia Sanin (Contact Author)

Université Paris Saclay

France

Skerdilajda Zanaj

Catholic University of Louvain - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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