Green innovation downturn: The role of imperfect competition

Abstract

We use strategic interactions to analyze the role of China’s state-subsidized production expansion in the recent downturn in solar photovoltaics innovation. To that end, we develop a dynamic game model in which N solar panel manufacturers compete in price and invest in cost-reducing research. The resulting Nash equilibrium displays an inverted U relationship between a manufacturer’s market share and its research effort. In the case where a local firm is competing against a foreign state-subsidized one, we obtain analytical and numerical results that are consistent with three stylized facts: (i) the foreign manufacturer progressively expands to become the dominant player, (ii) competition and innovation bring marginal costs down to zero, and (iii) each manufacturer’s research effort follows an increasing-then-decreasing curve. At a policy level, our model shows that national technology-push policies, such as R&D subsidies, can affect foreign innovation by changing the structure of global competition.