Theoretical traditions on market failureTheoretical traditionMarket failureRemediesNeo-classicalPublicgoods,SeeG&R2010externalities,informationeconomicsasymmetriesSee BroadbandIndustrial organizationMarketstructures.Firmstrategies, NaturalGuidelines2009monopolyEvolutionaryeconomicsSystemfailure,MarketsSeeBachandMatt2005forknowledgeGreater extent of market failure from neo-classical to evolutionaryeconomics(includingsystemfailures)Technische UniversiteitTUEindhovenUniversity of TechnologyEconomicsofInnovation20139/23/2013PAGE5
Theoretical traditions on market failure Theoretical tradition Market failure Remedies Neo-classical economics Public goods, externalities, information asymmetries See G& R 2010 Industrial organization Market structures, Firm strategies, Natural monopoly See Broadband Guidelines 2009 Evolutionary economics System failure, Markets for knowledge See Bach and Matt 2005 Economics of Innovation 2013 9/23/2013 PAGE 5 Greater extent of market failure from neo-classical to evolutionary economics (including system failures)
MarketfailurerationalesG&R(2010)RationaleProblemSolutionsAppropriabilityPolicies affectingPublic goodssystemofintellectualpropertyrights(IPR)Spillovers(PositiveImproveinprofitsofR&DTax incentivesexternalities)other (competing)firmsDirectR&D grantsPolicies towardsHigh uncertaintyUnderinvestmentinR&Duniversitiescombined with largefixed costsCompetitionpolicyIndustry standardsettingDuplication ofGovernmentOverinvestmentinR&Dinvestmentprocurementpolicies(Greenhalgh, C., & Rogers, M. (2010): pp. 18 - 23, pp.Technische UniversiteitTUEindhovenUniversity of Technology297-328)PAGE6EconomicsofInnovation20139/23/2013
Market failure rationales G&R (2010) Economics of Innovation 2013 9/23/2013 PAGE 6 Rationale Public goods Spillovers (Positive externalities) High uncertainty combined with large fixed costs Duplication of investment Problem Appropriability Improve in profits of other (competing) firms Underinvestment in R&D Overinvestment in R&D Solutions • Policies affecting system of intellectual property rights (IPR) • R&D Tax incentives • Direct R&D grants • Policies towards universities • Competition policy • Industry standard setting • Government procurement policies (Greenhalgh, C., & Rogers, M. (2010): pp. 18 – 23, pp. 297-328)
Market failures rationales CEU (2009)RationaleProblemMarket characteristicsMarketfailureSituations where individualMarketDynamicsandas positivemarketinvestors do not invest(Dominant)StrategiesofFirmsexternalitieseven though this would beefficientfromawidereconomicperspective, e.g.dueto thepositive spill-over effectsEquityAs awayto improveaccesstoDigital Divideobjectivesan essential means ofRegionalDevelopmentcommunicationandparticipationin society as well as freedom ofexpressiontoall actorsinsociety,thereby improving socialand territorial cohesionCEU(2009)BroadbandGuidelinesTechnische UniversiteitTUEindhovenUniversity of TechnologyPAGE7EconomicsofInnovation20139/23/2013
Market failures rationales CEU (2009) Rationale Problem Market characteristics Market failure as positive externalities Situations where individual market investors do not invest, even though this would be efficient from a wider economic perspective, e.g. due to the positive spill-over effects Market Dynamics and (Dominant) Strategies of Firms Equity objectives As a way to improve access to an essential means of communication and participation in society as well as freedom of expression to all actors in society, thereby improving social and territorial cohesion Digital Divide Regional Development Economics of Innovation 2013 9/23/2013 PAGE 7 CEU (2009) Broadband Guidelines
Market failures rationales relatedtoknowledgediffusionMatt&Bach2005RationaleProblemMarketcharacteristicsPublic goods as basicInformationasymmetryChanging knowledgeresearchbasesCreating demandMissing markets asSelectionofinnovativeproductspublicprocurement(lntellectual)PropertyAppropriabilityAbsorptivecapacityrightsSpilloversCooperationInternalizingspilloversTechnischeUniversiteitTUEindhovenUniversity of Technology9/23/2013PAGE8EconomicsofInnovation2013
Market failures rationales related to knowledge diffusion Matt & Bach 2005 Rationale Problem Market characteristics Public goods as basic research Information asymmetry Changing knowledge bases Missing markets as public procurement Selection of innovative products Creating demand (Intellectual) Property rights Appropriability Absorptive capacity Spillovers Internalizing spillovers Cooperation Economics of Innovation 2013 9/23/2013 PAGE 8
SummaryImportantforaddressing marketfailureis theunderlyingeconomicmodel ofthemarketNeo-classicaleconomics:perfectmarketIndustrialorganization:imperfectmarketsEvolutionaryeconomics:imperfectmarketofinformation and knowledge distributionChoice of modelis alsoa politicaland ideologicalproblemTechnischeUniversiteitTUEindhovenUniversityofTechnologyPAGE9EconomicsofInnovation20139/23/2013
Summary • Important for addressing market failure is the underlying economic model of the market • Neo-classical economics: perfect market • Industrial organization: imperfect markets • Evolutionary economics: imperfect market of information and knowledge distribution • Choice of model is also a political and ideological problem Economics of Innovation 2013 9/23/2013 PAGE 9