Journal of Evolutionary Economics

, Volume 22, Issue 5, pp 1009–1027 | Cite as

Inter-firm knowledge diffusion, market power, and welfare

Regular Article


We propose an infinite-horizon quantity-setting differential game with learning spillovers and organizational forgetting to analyze the optimal management decisions affecting the evolution of the stock of know-how, and, in turn, the dynamics of productive efficiency. Specifically, we study the long run impact of inter-firm knowledge diffusion on market power, i.e. the ability of a firm to raise the price above the marginal cost, and welfare. We consider two types of processes through which knowledge is acquired: (i) passive learning, or learning-by-doing, where managers do not actively invest in information and (ii) active learning, or learning-by-investing, where managers acquire new and additional information through specific investments in human capital. We show that: under (i), knowledge diffusion reduces market power; under (ii), knowledge diffusion reduces market power as long as learning spillovers are sufficiently important. From a welfare viewpoint, we also show that: under (i), knowledge diffusion is always welfare-enhancing; under (ii), weak spillovers are required in order for knowledge diffusion to be welfare-enhancing.


Game theory Differential games Knowledge diffusion Learning spillovers Organizational forgetting 

JEL Classification

C73 D83 L13 


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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.School of Accounting, Economics and FinanceDeakin UniversityBurwoodAustralia
  2. 2.Department of EconomicsMonash UniversityClaytonAustralia

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