Environmental Innovation under Cournot Competition

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 configuration, collusion can be welfare enhancing.

Sustainable systems - game theory as a tool for preserving energy resources

“…The paper 'Environmental innovation under Cournot competition' from June 2007 contains a unique market approach. According to the comments of the authors who presented this paper, contrary to the existing literature, a market approach was used in modeling the interaction between the output market, where companies play á la Cournot, and the emission permit market [2]. The authors make mention that besides their contribution, only Montero's article takes into account a strategic interaction in the output market [3].…”