Inter-firm knowledge diffusion, market power, and welfare |
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Authors: | Luca Colombo Paola Labrecciosa |
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Institution: | 1. School of Accounting, Economics and Finance, Deakin University, Burwood Campus, 221 Burwood Hwy, Burwood, 3125, VIC, Australia 2. Department of Economics, Monash University, Clayton Campus, Wellington Road, Clayton, 3800, VIC, Australia
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Abstract: | We propose an infinite-horizon quantity-setting differential game with learning spillovers and organizational forgetting to analyze the optimal management decisions affecting the evolution of the stock of know-how, and, in turn, the dynamics of productive efficiency. Specifically, we study the long run impact of inter-firm knowledge diffusion on market power, i.e. the ability of a firm to raise the price above the marginal cost, and welfare. We consider two types of processes through which knowledge is acquired: (i) passive learning, or learning-by-doing, where managers do not actively invest in information and (ii) active learning, or learning-by-investing, where managers acquire new and additional information through specific investments in human capital. We show that: under (i), knowledge diffusion reduces market power; under (ii), knowledge diffusion reduces market power as long as learning spillovers are sufficiently important. From a welfare viewpoint, we also show that: under (i), knowledge diffusion is always welfare-enhancing; under (ii), weak spillovers are required in order for knowledge diffusion to be welfare-enhancing. |
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