Abstract
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. When there are full information sharing under R&D cooperation and involuntary information leakages under R&D competition, we find that the only case where government intervention is needed is the case where R&D cooperation yields a higher welfare but smaller profits for the follower eco-industrial firm than R&D competition. Furthermore, because of the market power that the eco-industry enjoys, we show that more total R&D efforts under R&D competition do not necessarily translate into more abatement activities and larger social welfare. When there are no involuntary leakages of information under R&D competition, this result occurs because 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.
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