Groupe d’études et de recherche en analyse des décisions

Environmental R&D in the Presence of an Eco-Industry

Alain-Désiré Nimubona University of Waterloo, Canada

We compare the performance of R&D cooperation and R&D competition within the eco-industry using a model of vertical relationship between a polluting industry and the eco-industry. The polluting industry is assumed perfectly competitive and the eco-industry is a duopoly in the market for abatement goods and services, with one firm acting as a Stackelberg leader and the other firm as a follower. Whenever government intervention is needed in the organization of environmental R&D, we find that the objective is always to induce R&D cooperation. Furthermore, we show that R&D competition can induce more total R&D efforts than R&D cooperation even for significantly high R&D spillovers if the marginal environmental damage is large. However, because of the market power that the eco-industry enjoys, this does not necessarily translate into more abatement activities and larger social welfare.