Pollution-Controlling Innovation in Oligopolistic Industries: Some Comparisons between Patent Races and Research Joint Ventures

Much of the literature on pollution-control innovation has focused on normative comparisons of exogenous regulatory policies in light of the incentives they induce on firms′ R&D efforts. In contrast, in the positive analysis below, both R&D incentives and regulatory policy arise endogenously as functions of market structure and external cost differentials. Incentives for pollution-controlling innovation are found to arise from within the industry in a patent race setting when innovation gives the race winner(s) a cost advantage over the other industry members. This cost advantage is shown to come about when innovating firms successfully use their influence to raise their rivals′ costs by bringing about a policy change forcing industry members to internalize pollution externalities. In contrast, an industry-wide research joint venture (RJV) has incentive to collusively prevent development of innovation unless environmental activists are sufficiently strong. This latter result is illustrated by the case U.S. vs Automobile Manufacturers Association, where the Justice Department found evidence that the "big three" used an RJV to slow the introduction of pollution-control innovation.