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 reveals an inverted U relationship between a manufacturer's market share and her research effort. In the duopoly case, with a local firm competing against a foreign state-subsidized one, we obtain analytical and numerical results that are consistent with a set of stylized facts, namely (i) the foreign manufacturer progressively expands to become the dominant player (ii) competition and innovation bring marginal costs down to zero (iii) each manufacturer's research effort follows an increasing-then-decreasing curve. At a policy level, these theoretical results suggest that national technology-push policies can affect foreign innovation, by changing the structure of global competition.