1 Yuri Biondi Preg CRG – Ecole Polytechnique (Paris, France) Pierpaolo Giannoccolo Department of Economics - University of Bologna (Italy) Workshop “Innovation in Network Industries: Accounting, economic and regulatory implications” Innovation and Regulation Chair – Paris, 16 March 2011 Complementarities, intangibles and the corporate accounting system: an economic map for industrial regulation

2 This workshop aims to investigate R&D and innovation strategies in network industries from a broad comparative perspective: inter-sectors; inter-disciplines. In particular, we purport to integrate economic analysis with accounting and law: Accounting, Economics, and Law: A Convivium (Berkeley Electronic Press) Program Details The paper coauthored with Pierpaolo Giannoccolo provides a summary and an economic analysis based upon this institutional approach. The scope of this workshop

3 Our paper 1/2 Our approach focuses on three featuring facts and dimensions of R&D and innovation strategies in network industries:  Complementarities: Network industries are featured by the presence of significant complementarities on the supply and the demand sides: Demand Side: Complementary products and services makes their joint bundle more attractive and useful for the final consumers; Supply Side: Firms choose to work together on complementary business activities, sharing costs and benefits of them.  Coopetition: Innovation and R&D has been increasingly developed through cooperation agreements between independent firms aiming to exploit such complementarities (joint ventures). Coopetition is a strategic mix of cooperation and competition that is likely to occur in presence of complementarities  Intangibles: Innovation and R&D involve intangible resources Intangibles do not have a market basis, but a firm-specific basis

4 Our paper 2/2 Our paper develops an economic analysis of competition regulation under conditions of complementarities, coopetition and intangibles. Firms and Markets are different. Firms are featured by accounting systems that are not price systems (Biondi et al “The Firm as an Entity”; Biondi 2010 “L’entité enterprise”). Innovation and R&D joint ventures introduce accounting systems to recognize and measure resources committed to, and generated from the cooperation. Accounting systems shape both costing (from the supply side) and pricing (from the demand side), and profit margins. Firm-specific costing and pricing (and related margins) have welfare implications We claim that, under these conditions, regulatory policies should pay attention to accounting structures that define costing and pricing. In particular:

5 Final Users BUNDLE The model – general framework Whole Industry Infrastructures Products Services Firm 1, Firm 2, … Consumers Example: telecommunication outcome Smart-phone Call Internet streaming

6 Consumers BUNDLE The model – our analysis Two Firms No - Cooperation Firm 1 Firm 2 b NC = b 1 + b 2 Cooperation Firm 1 Firm 2 bCbC Consumers p1p1 p2p2 pBpB pRpR Transfer price

7 Consumers The model – Input-Output analysis 1/2 Firms No - Cooperation Firm 1 Firm 2 Cooperation BundleOutputInput b NC = b 1 + b 2 b 1 =q 1 T + h 1 R b 2 =q 2 T + h 2 R Firm 1 Firm 2 b C = q 1 T + q 2 T + γ*( h 1 R +h 2 R ) q1Tq1T q 2 T + γ*( h 1 R +h 2 R )h1Rh1R

8 Consumers The model – Input-Output analysis 2/2 Firms No - Cooperation Firm 1 Firm 2 Cooperation BundleOutputInput b NC = b 1 + b 2 p 1 * b 1 p 2 * b 2 Firm 1 Firm 2 b C = q 1 T + q 2 T + γ*( h 1 R +h 2 R ) p B * q 1 T p B * (q 2 T + γ*( h 1 R +h 2 R ))p R * h 1 R p i =A - ( b i + θ*b j ) p B =A - b C

9 Solution – Supply Side 1/2 pRpR γ П 2 C = П 2 NC П 2 C > П 2 NC П 2 C < П 2 NC pRpR γ П 1 C = П 1 NC П 1 C > П 1 NC П 1 C < П 1 NC 1 pRpR pRpR γ Firm 2 Firm 1 Firm 2 cooperates Firm 1 cooperates

10 Solution – Supply Side 2/2 pRpR γ П 2 C > П 2 NC П 2 C < П 2 NC П 1 C < П 1 NC П 1 C > П 1 NC 1 П i C < П i NC Cooperation Area П i C > П i NC p R1 (γ) p R2 (γ) П 2 C = П 2 NC П 1 C = П 1 NC

11 Solution – Consumers Side pRpR γ U C > U NC U C < U NC 1 pu(γ)pu(γ) U C = U NC

12 Analysis – Coopetition and Welfare 1/2 pRpR γ 1 pu(γ)pu(γ) Pareto Optimum Area p R1 (γ) p R2 (γ) NO Pareto Optimum Area U C > U NC consumers’ utility improving П i C П j NC U C < U NC consumers’ utility decreasing П i C П j NC

13 Analysis– Coopetition and Welfare 2/2 pRpR γ 1 pu(γ)pu(γ) p R1 (γ) p R2 (γ) “Competition Trap” “The dark side of cooperation” U C < U NC consumers’ utility decreasing П i C > П i NC  i U C > U NC consumers’ utility improving П i C < П i NC  i

14 Results By simple computation, we identify the condition to have positive R&D investment by firm 1 and 2  x 1 R >0 if p R > p R ( x 1 R ) AND x 2 R >0 if p R < p R ( x 2 R ) PROPOSITION: The joint condition to have positive R&D investments by both firms is that p R ( x 2 R ) > p R > p R ( x 1 R ) COROLLARY: if we impose the marginal-cost pricing, then, the firm 1 do not invest in R&D p R ( x 2 R ) > p R > p R ( x 1 R ) > p R = c x 1 R The optimal value of resources that the firm 1 is willing to invest in R&D would be negative  x 1 R < 0 NO COOPERATION

15 Conclusive Remarks Coopetition, complementaries, and intangibles critically shape the economic organization of innovative industries, especially their joint activities of R&D between competing firms Regulatory frameworks and policies are critical to enable the optimal mix of competition and cooperation in this specific industrial context. Competition is not always welfare improving (I) Regulatory policies that only purport to mimic perfect competition conditions neglect the featuring economic structures that characterize innovative industries. (II) Even our simplified model stresses the need of a broader and clearer understanding of economic and accounting structures that enable innovative industries.  Need for a standardized accounting systems for contractual and regulatory purposes. Policy Makers should pay attention to Accounting Systems for costing and pricing

16 Thanks Merci Danke Grazie