Climate change is a global threat and there is a need to move towards a sustainable future. One possibility is investing today in research and development (R&D) to produce environmentally friendly technologies; such R&D is also known as green R&D. Many are advocating the integration of environmental policies with industrial policies, which can include greater regulatory flexibility toward firm cooperation in R&D efforts. While there is a large body of research on traditional R&D, the literature on green R&D is more limited and most studies on firm-level green R&D organisations model competition using the Cournot model with homogenous goods.
Therefore, in this thesis we build a model to analyse the effects of firm-level green R&D organisations on social welfare and green R&D levels under both Cournot and Bertrand competition with differentiated goods. The four types of R&D organisations that we analyse are non-cooperative R&D, non-cooperative research joint venture (RJV), cooperative R&D and cooperative RJV. In the non-cooperative model firms conduct R&D independently without expressly sharing knowledge, while under cooperative R&D, firms coordinate by selecting their R&D level jointly but also do not expressly share knowledge. The difference between these two models and the two RJV models is that firms completely share knowledge in the RJVs.
The environmental policy used is an emissions tax where the regulator cannot pre-commit to the tax rate. Interaction between firms and the regulator is structured as a three stage game, and equilibrium levels are derived through backward induction. In the first stage, firms choose their level of green R&D to maximise profits either independently or cooperatively. Then in the second stage, the regulator sets the optimal emissions tax rate to maximise social welfare. Finally in the third stage, firms compete in the output market through quantities (Cournot) or prices (Bertrand).
Results indicate the interested variables move in similar patterns regardless of type of R&D organisation or market structure. Generally cooperative R&D is more desirable from society’s point of view, and always preferred by the firm. Further, the Bertrand game generally yields higher welfare, unless damages are large and R&D relatively inefficient. Interestingly, the Cournot market structure appears to always generate higher firm profits and lower tax rates. Hence, firms always have an incentive to compete via Cournot while conducting R&D cooperatively.