Tuesday, March 22, 2011
The U-Turn Chpt. 17: 215-216
Romer observed companies investing heavy sums into R&D. At the same time, he was able to witness a controversy about the university's reluctance to hire a Fuji executive to the school of business because Kodak feared he would gain too much insight into their secrets. In Romer's previous model, this didn't make sense; if it was perfect competition, then Kodak would invent something and Fuji would find out the next day. But now there was an incentive to keep that information a secret, otherwise why would these companies invest so much money into inventing them. So Romer creates a new model. However, he has to make the assumption that Fuji may receive some benefit from Kodak's discovery, but not much (which is a shortcut). But now the math keeps coming back to haunt him and he has to go out and deal with it.
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A for Bob.
ReplyDeleteI think the thinking is a bit confused here.
What Romer had done was this: built a model with perfect competition (so economic profits were pushed to zero), and spillovers (so everyone had access to your new invention). The key problem here is why should you invest in R&D at all?
What Romer switched to was this: a model in which R&D was monopolistic instead of perfectly competitive, so there was an incentive to keep your invention secret so that you could sell it at a higher price. The thing is, you don't sell R&D to consumers, you sell it to a different group of producers. Those firms can still be perfectly competitive and have spillovers. In this framework, the R&D firms have to keep making new R&D discoveries, because once they sell one to a producer someone else gets them free through a spillover. But, in that first sale, they get to charge a marked-up price because they're a monopolist.