Innovation Economics Flashcards
(84 cards)
1
Q
What is the role of the government?
A
Fixing market failures the government should intervene when there are externalities
2
Q
Why is the government not innovating?
A
Because lack of incentives, lousy at picking winners, and unclear if voters want innovation
3
Q
Why the innovator can be a monopolist?
A
- Because the innovation is drastic
- because is the only using the process innovation
- because others are restricted to use it because of patents.
4
Q
What happened to marginal costs with R&D spillovers
A
Get reduced
5
Q
Beta for R&D spillovers
A
If B=1, benefits completely on the others investment in R&D
If B=0, there are no spillovers
If B is small, R&D investments are complimentary, the more firm 1 does the more firm 2 will do.
When B is large, R&D investments are substitutes, the more firm 1 does the less firm 2 will do. (Freeriding)
6
Q
Nash equilibrium
A
Is an optimal outcome without unilateral deviation. Individual players have no incentive to deviate from the initial strategy.
7
Q
On what depends the outcome of non cooperative R&D
A
Spillovers
8
Q
The two types of R&D corporation
A
- do R&D independently put coordinated
- Do R&D together as one firm, but also continue to maintain product market competition.
9
Q
What’s happens when firms do R&D independently but coordinated.
A
When there are high spill overs, the free riding problem is no longer an issue and firms do more R&D.
But in the case of Low spillovers, there is no longer fear of being left behind so firms do less R&D . this means that costs and prices are higher than without corporation.
10
Q
What happens when firms do R&D together as one firm, but also continue to maintain product market competition.
A
B=1, more R&D is done which leads to lower cost and higher profits, but this may cause monopoly.
11
Q
What is the impact of spillovers geographically according to Keller’s paper?
A
They las until 2000 km and it shouldn’t be overlooked.
12
Q
What is the primary purpose of copyrights?
A
Foster creation and dissemination of intellectual works .
13
Q
What are within group network effects?
A
Also called the direct network effects. users have utility not only from a product, but from the interaction with each other. Social media for example. Social norms, languages, fashion, phone, Google Docs, Waze, phone calls.
14
Q
What happens if there are positive direct network effects?
A
The more activity level of the group, the more attractive it becomes for members to have more activity level. Also called attraction loops.
These may lead to coordination of joining a single platform, creating a winner takes all situation.
15
Q
What happens if there are positive direct network effects?
A
The more activity level of the group, the more attractive it becomes for members to have more activity level. Also called attraction loops.
These may lead to coordination of joining a single platform, creating a winner takes all situation.
16
Q
What are cross Group network effects?
A
Also called indirect network effects. Agents can be sorted by their role or their benefit from attraction and they belong to different groups.
Like trading places, matching apps (positive) and Ad-financed content platforms (negative).
17
Q
What is the attraction spiral in cross group network effects?
A
The more activity in one group makes it more attractive to other groups to increase their activity and vice versa.
18
Q
What is the attraction / repulsion pendulum in cross network effects?
A
One group may be attracted by the other, but these other group may react with repulsion or indifference. (Ad-financed media or virus producers)
19
Q
What is the attraction spillover in cross network effects?
A
When group is attracted while the other doesn’t care.
For example: amateurs versus professionals, or early and late users
20
Q
What is the purpose of patent policy?
A
Balance demands of allocational and dynamic efficiency to incentive generation of ideas, information and innovation.
Patent may be used to protect innovators and make the economy more dynamically efficient.
21
Q
Key factors in a competitive industry illustrated by the Nordahaus Model
A
- The optimal length of a patent is positive but finite.
- Is shorter the more elastic is the demand.
- Shorter the lower the cost of R&D
22
Q
On what depends the length of a patent protection
A
On how broad is it.
If patents are broad it should be shorter. If not it would confer too much monopoly power.
23
Q
What is the general goal with the design of a patent?
A
Choose the design that minimizes the welfare loss per dollar of monopoly profit subject to achieving the profit needed to ensue the right innovative effort.
24
Q
What are the Denicolo’s arguments about the optimal length and breadth of patents?
A
Denicolo says that the optimal length and breadth of patents depends on market conditions.
- long but narrow are appropriate for competitive industries
- short but broad are for olipolistic and monopolistic industries.
25
What tells me if m enter at innovation?
The probability of success, measures the likelihood that a desire outcome occurs, calculating the odds.
26
What are sleeping patents?
Patents that aren’t used because fore the monopolist is more worthy to make sure that the rival doesn’t enter than accept the entrance as a duopolist.
27
What is patent licensing?
When the owner of a patent grants the right to use the innovation for a payment or fee.
28
On what depends the profitability of patent licensing?
1. The nature f competition
2. Drastic vs. non drastic innovation
(In Bertrand there is no incentive to license)
29
Why te requieres rate of return of the investor in r&d may be so high?
1. Asymmetric information between the innovator and the investor
2. Moral hazard by the innovator from separation of ownership
3. Tax considerations crate a wedge between external finance and retained earnings financement.
30
What’s an automation?
A technological application that requieres minimum human intervention.
- robotization
- machine learning and AI
31
Why automation is gaining ground in non routine tasks?
1. Robot prices have fallen 10% annually.
2. Big data is providing enough info to automate non routine tasks.
3. Human cognitive biases (judges etc)
32
What is moral hazard?
When one agent in a transaction has the opportunity to take risks because they don’t bear the full consequences of those risks, often due to asymmetric information.
Example: la Isa se porta mal porque las consecuencias las pago yo, yo no puedo controlar si ella se porta bien o no. This leads to suboptimal outcomes.
33
What is asymmetric information?
When one agent has more or better information than the other, producing an imbalance of power in the transaction.
34
An example of moral hazard in the relation between an investor and an entrepreneur.
The investor cannot fully monitor the entrepreneur’s efforts or decisions once the investment is made. This situation creates an opportunity for moral hazard:
The entrepreneur might decide to use the funds for personal benefits or high-risk projects because the consequences of failure are more severe for the investor than for the entrepreneur.
The investor, having less information about the entrepreneur’s actions and intentions, is unable to ensure that the funds are used efficiently and prudently.
35
How can moral hazard in the context of asymmetric information be mitigated?
- Contracts and incentives
- Milestones-based funding
- Monitoring and reporting
- Investors have a seat in the board
36
What is a network good?
Is a product or service whose value increases as more people use it. A product that has network effects, where the utility of the goods bot only depends on the product but also the number of users .
37
An example of a network good
A classic example of a network good is a social media platform like Facebook. The standalone benefit (a) might be the basic enjoyment or utility from using the platform, such as the ability to share photos and updates. The network benefit is the increased value from having friends and family also using the platform, making it easier to connect and interact with them.
38
What is static efficiency?
Traditional allocation of resources to produce existing goods and services so as to maximize surplus and minimize deadweight loss
39
What is dynamic efficiency?
Creation of new goods and services to rise potential surplus over time
40
What’s the schumpeterian hypotheses
Concentrated industries and larger firms do more R&D, than competitive industries and small firms
41
What’s the difference between drastic and non drastic innovations?
Drastic have great cost saving that permit the innovator ro set the price as a monopolist, non drastic tie a cost advantage but not at that power.
42
Implications for competition and innovation
1. The R&D effort of a firm will fall as the number of n firms increases because this will increase the output of each firm.
2. Allowing firms to enter until they no longer have an incentive to do so, when firms earn 0 profit after allowing for R&D costs.
3. Depends on the sector ( R&D is more likely n science based sector regardless of the firm size)
43
Demand function of consumers of a network good
And profit expression
P = 100F * (1-f)
R = P * n * Q - C
44
Why can multiple equilibrium happen in a market for. Network good.
1. Positive feedback loop
2. Threshold effects
3. Coordination of users
45
Dynamic competition consequences of moving from a compatible network to a non compatible one.
1. Increased competition, leading to need of differentiation and investment.
2. One network becomes the dominant player and excessive advantage.
3. Network fragmentation, reducing overall utility for everyone.
46
Which type of competing networks is more likely that both remain active in the long run, in compatible networks or non compatible networks ?
Compatible networks
47
If two firms compete in prices and then they merge to a singe company, how does his affect prices and welfare?
Prices for both goods will decrease after the merger.
This reduction in prices will increase the consumer surplus, merged firm maximizes join profit leading to higher overall producer surplus.
The increment in consumer and producer surplus could lead to an overall increment in total welfare.
48
What is the role of Institutions in Stimulating Innovation and Economic Growth
They play a crucial role, establishing rues, norms, incentives that influence how economic agents interact, invest and take risks.
49
What are the effects of technology adoption on productivity growth?
Enhanced efficiency: new technologies can lead to improvements in productivity by increasing efficiency in production processes, reduction of costs and creation of new products.
Economic spillovers: the adoption of technology by on firm often spillover to other firms in the sector, enhancing even more the productivity growth of an entire industry.
Institutional support: institutions that support R&D often provide infrastructure and IPR that can accelerate the adoption and diffusion of new technologies, boosting overall productivity growth. Also they facilitate access to capital, education and training…
50
The role of institutions stimulation innovation and economic growth, based on the market of ideas by Mokyr.
Mokyr emphasizes the importance of a “market for ideas,” where intellectual exchange and the dissemination of knowledge drive innovation and economic growth. He also says that is crucial for institutions to promote the open dialogue, collaboration and free flow of information to foster an environment where ideas can be exchanged and improved. Specially institutions like universities, research I, and cultural norms that value curiosity and critical thinking, to facilitate the diffusion of concepts and foster breakthrough innovations.
He also highlights the importance of an effective IPR system to incentive innovation by ensuring the inventors can reap the reward of their inventions, which leads to more investment in R&D.
51
Discuss the role of apprenticeship institutions in knowledge diffusion and growth in the preindustrial economy,by Clans Guilds.
According to Clans Guilds, apprenticeship institutions have been historically vital, specially in preindustrial economics, for transmitting technical skills and specialized knowledge across generations and regions, providing hands-on training, mentorship and fostering strong social networks which facilitated the sharing of information and techniques, accelerating the diffusion of knowledge, contributing to economic dynamism and playing a key role in economic growth by creating a skilled workforce capable of sporting and improving technologies.
52
If there are 2 firms producing 2 goods: in case A, complementary goods. And in case B, substitute goods.
If one of the firms realizes a process innovation that reduces marginal costs. What happens to the firms prices and profits?
And if the innovation could be useful for the other firm, would the innovative firm be willing to license the innovation for free to the others?
For complementary goods the prices of the innovative firm would decrease due to reduced marginal costs, and their profits would increase as well because of costs and probable increment in quantity. The other company instead could face a slightly increase in price because of the aggressive competition, leading to a decrease in profits.
If the goods were substitutes, the price of both firms would decrease (not in the same way tho). The innovative firm’s profit will increase due to lower costs and potentially higher market share. While the other firm’s profit might decrease as it faces more aggressive pricing from the other firm.
As for the licensing in case of complementary goods, the innovative firm might consider licensing because both firms would benefit from higher combined demand and profits when prices are lower.
But in case of substitute goods the innovative would likely not be willing to license, because it would intensify competition, dissolving the price advantage and reducing their profits.
53
On what dependes the willingness to license an innovation?
the willingness to license the innovation depends on the nature of the goods. For complementary goods, there is an incentive to collaborate, while for substitute goods, competition discourages free licensing.
54
How we compute te equilibrium of a game between to companies?
Based on the best responses, identified where both companies choose their best responses simultaneously. (Both are best responding to each other is a Nash equilibrium)
55
Discuss the coordination issues when needing to adopt industrial standards
Multiple equilibria creates a coordination problem, firms would need to align their choices to achieve mutually beneficial outcomes. Including efficiency and risks, coordinating actions, communication, agreements and external incentives: governments or industry might play a role in facilitating coordination by setting standards or providing incentives for adopting new technology, helping to achieve the more efficient equilibrium.
56
Discuss the role apprenticeship and guilds institutions in Europe stimulating innovation and economic growth as opposed to comparable institutions in other parts of the world.
Apprenticeships and guilds in Europe played a crucial role in skill development and knowledge transfer. With apprenticeships young workers learned trades under the supervision of experienced masters, ensuring the transmission of specialized skills and tacit knowledge. And with guilds controlled the quality of goods, maintained standards, provided training, and protected the economic interests of their members. Also enforced rules and provided a support network for their members.
Impacting innovation and growth by skill development, knowledge diffusion and standardization and quality control.
———————————————
In china and Middle East, where rigid hierarchical structures and government controlled institutions focused on maintaining traditions and meeting the state’s needs not promoting individual creativity, innovation and growth to the same extent.
57
Discuss the role of sieve parks in stimulations innovations and economic growth.
Science parks are designed to promote research and development by providing a supportive environment for companies and research institutions. They offer infrastructure, resources, and networking opportunities to foster innovation and commercialization of new technologies.
They impact on innovation and growth by providing collaboration and synergy, access to resources, networking and mentorship and commercialization, acceleration innovation and driving economic growth.
Examples: Silicon Valley and Cambridge Science Park.
58
What happens if there is no network value for a customer in a network?
Without network effects the utility depends only on the standard alone benefit of the network.
59
What happens if there is no stand alone benefit for a customer in a network?
The utility depends only in the network value of the network.
60
What is the importance of expectations in network markets?
In network markets, the value of the product increases with the number of users. If consumers expect that many others will use the product, their perceived utility from the network effect increases, boosting demand. Conversely, if consumers expect low adoption, their perceived utility drops, reducing demand. This feedback loop can lead to multiple equilibria:
• A high-adoption equilibrium where everyone joins the network.
• A low-adoption equilibrium where few or no users join the network.
61
Why is there a tendency in network industries to consolidate into fewer firms or even into a monopoly?
Is it stronger or weaker for products in which the consumers multihome (multiple networks simultaneously)?
Networks tend to consolidate due to:
1. Positive feedback loops
2. Economies of scale
3. Winner takes all dynamics
The tendency is weaker in multihome, because consumers can easily switch networks, multiple networks coexist and create competition.
62
What are the potential effects of interoperability among network platforms?
- Increased competition, preventing market consolidation
- Consumer choice, reducing lock-in effects
- Innovation of the platforms
63
What the definition of platform?
Entity that brings together economic agents and actively manages network effects between them.
64
How does a platform create economic value? And explain them. And examples.
By leveraging mutual positive cross group and within group effects and through stand alone products or services.
Leverage Within-Group Network Effects: occur when the value of the platform increases as more users join the same side of the platform. Ex: facebook
Leverage Cross-Group Network Effects: occur when the value of the platform increases for one group of users as the size of the other group grows, common in two-sided markets.
Ex: Uber
65
How does a platform CAPTURE economic value? Explain and examples
By charging users that are enjoying the network effects, we charge directly for access, with subscriptions, fees, freemium.
EX: Netflix
By charging others,t for the users its free o low-cost, and the revenue comes from other group maybe offering a bundle including a “bad” (ads or data).
Ex: Google, Insta…
66
What are the network effects of a R&R system?
- Alleviate the asymmetric information
- more transactions led to more effective R&R systems
- Users may prefer purchasing on the platforms they can obtain info from.
- R&R SYSTEMS FUEL SELF-REINFORCING MECHANISMS THAT CONTRIBUTE TO MAKE MORE SUCCESSFUL. PLATFORMS.
67
When do data-enabled self-reinforcing effects lead to long-lasting competitive gains for the platforms that generate them?
- The value added by user data must be high and long-lasting.
- Data must be proprietary.
• Not shared with or easily accessible by competing platforms
- Data must lead to hardly imitable service improvements.
- Network effects are generated.
• Users realize that their benefits increase thanks to the data collected from other users.
68
What is the task based framework of Acemoglu an Restrepo (2019)
Acemoglu and Restrepo (2019) provide a task-based framework to understand how technological changes affect labor demand. This framework divides tasks into two categories:
• Routine tasks: Tasks that can be easily automated or performed by machines.
• Non-routine tasks: Tasks that require human intervention and are difficult to automate.
69
What are the effects of the task based frame work of Acemoglu and Restrepo?
1. Displacement effect (quita)
2. Reinstatement effect (pone en diferente lugar)
3. Complementary effect (se hace en conjunto)
70
Are there differences in the adoption of automation technologies between the US and Germany? In
particular, explain the role of labour supply in influencing these differences
Yes, the differences may be:
1. Intensity and focus of automation (US being more aggressive, more in private sector, educing labor costs) (Germany more focused on manufacturing, high quality engineering)
2. Types of technologies adopted (US use AI, machine learning, data analytics and Germany focuses more on industrial automation and robotics, manufacturing processes)
And the role of labor supply:
1. Labor market structure (US flexible, DE more rigid)
2. Skill levels and education (US low skill more routine tech; DE more high skilled labor force, more complementary than replacement tec)
3. Demographic factor (US younger more people, DE; less people and old)
4. Industrial policy, labour unions and work councils (US no, DE yes)
71
What is the impact of automation on the labour market? Discuss this problem using the task-
based framework of Acemoglu and Restrepo (2020).
Automation directly impacts the labor market by displacing workers who perform routine tasks. When machines or algorithms can perform these tasks more efficiently, firms tend to replace human labor with automation technologies. This leads to job losses in sectors heavily reliant on routine tasks. At the same time enhance productivity by increasing the efficiency of production can lead to create new opportunities and demand for labor in other areas of the economy.
As routine tasks are automated, there is a reallocation of labor, workers displaced from routine jobs may find employment in roles that require human cognitive skills or physical dexterity that are difficult to automate.
72
What is the relation between the phenomenon of aging in developing countries and the adoption of automation technologies? Briefly discuss both the theoretical mechanisms and the empirical evidence on this relation.
The aging population in developing countries drives the adoption of automation due to labor shortages and rising wages, making automation economically attractive. Empirical evidence shows countries like Japan and Germany lead in automation to counteract workforce declines. Sectoral studies indicate higher automation in industries facing labor shortages, such as manufacturing and healthcare. Automation helps maintain productivity and economic growth despite demographic challenges, often leading to wage polarization between high-skill and low-skill jobs.
73
He a content producer could monetize thorough other users? Would it be leverage within group network or across network?
Offering a free service while charging advertisers. Would be leverage through cores group network effects.
74
Why the network size matters in the decision of users to subscribe to a network?
Because of positive with in group network effects, it directly influences the utility derived from the network. A larger expected network size increases the utility derived from the network, making it more attractive to potential users. Which then are more likely to subscribe if they believe that many others will also subscribe.
75
What are the stand alone benefits in a network good?
Examples.
The utility or value that a user derives from the good without considering the size of the network.
Ex: Word, Fitbit.
76
What are the network benefits in a network good?
Examples.
The additional utility or value that a user derives from the good due to the presence of other users in the network.
Ex: facebook, eBay, Uber, airbnb
77
What is the demand function for a network good if this is the utility function:
r + B ne - A
Q= 1 - (A -r ) If A < r + ne
———
ne
Q= 0 - (A -r ) If A > r + ne
———
ne
78
Why expectations matter for the demand function for a network good if this is the utility function:
Expectations about network size significantly influence user decisions and demand, highlighting the importance of perceived network growth and participation. When the price A is near the stand-alone benefit r . Positive expectations can lead to higher demand, while negative expectations can reduce it.
79
In the case of a firm that reduces costs under the competitors price. What is the change in profits n case of drastic and non drastic innovation?
Drastic: The firm an set the price lower than the costs of the other firm and capture the entire market (monopoly) Profit= (P - c)* Q
Non drastic: The firm lowers cost but the market remains competitive, only gaining cost advantage. Profit = (C0 - C1) Q
80
In the case of a firm that reduces costs under the competitors price. What is the social surplus of innovation in case of drastic and non drastic innovation?
Drastic Innovation
• Consumer Surplus: Increases due to a lower price and higher quantity.
• Producer Surplus: The innovating firm earns substantial profits, while non-innovating firms exit the market.
• Total Surplus: Increases significantly, as the cost reduction is passed to consumers and the market expands.
Non-Drastic Innovation
• Consumer Surplus: May increase slightly if the price drops a bit due to competitive pressures.
• Producer Surplus: Increases for the innovating firm due to cost savings but remains zero for other firms.
• Total Surplus: Increases by the amount of the cost saving across the market, benefiting both consumers (through lower prices) and the innovating firm.
81
A monopolist gets a cost reduction under the current price due to innovation. What happens to profits and social surplus in case of drastic and non drastic innovation?
Drastic:
The monopolist can lower the price, capturing the market demand.
Social Surplus:
• Consumer Surplus: Increases due to lower price and higher quantity.
• Producer Surplus: Increases significantly for the monopolist.
• Total Surplus: Increases substantially.
Non drastic:
The monopolist maintains the price but enjoys a higher profit due to the reduced cost.
Social Surplus:
• Consumer Surplus: Remains the same as the price doesn’t change.
• Producer Surplus: Increases for the monopolist.
• Total Surplus: Increases by the amount of cost savings.
82
What are the issues related to the market not being well equipped for AI anticipated leap in productivity?
1. Labor market displacement
2. Bias and fairness
3. Privacy concerns
4. Ethical dilemmas
5. Regulatory challenges
83
What policy measures could be implemented to increase the social value of AI?
1. Investment in education and re-skilling
2. Regulation and standards, to address bias, data privacy, transparency…
3. R&D to address technical challenges
4.collaborations between government and universities to develop AI that serve public interests
5. Incentives for transparency and ethical AI
6. International cooperation for policies and standards.
84
Discuss a presentation
Insights from innovation economists of COVID 19.
Would like to highlight from this paper the importance of the understanding that innovation is not only about the creation of inventions but also about their diffusion to society.
I found very interesting the fact that this paper help us to analyze how a crises like covid, requiere an increment in R&D, push an urgent need for innovative solutions, technologies and practices and create an economic stimulus. Creating jobs, stimulating demand of different goods and services, like the ICT development use f remote working platforms, delivery service, etc. Providing a blueprint of how industries can grow through crises.
The paper also drive us to question why isn’t there investment in R&D for vaccines and the health prevention market. Mentioning the lack of demand of preventive health as a sociological behavior leading to a lack of incentive for its investment leading to a discussion on policy implications.
