In 2007, Webasto, a German auto parts maker decided to license the rights to one of its best-selling products – a roof-top solar panel for trucks – to the highest bidder at a public auction. Assume that the demand for trucks is p = 100−q and that the roof-top solar panel allows truck manufacturers to reduce the constant marginal cost of production from 70 to 60.

(a) Confirm that this is a non-drastic innovation and that the marginal cost would have to be reduced to less than 40 for the innovation to be drastic.

(b) Suppose that the truck industry is a monopoly (not threatened by entry). Determine how much the monopolist is willing to pay to acquire the innovation from the auto parts maker.

(c) Suppose that the truck industry is Bertrand-oligopolistic with nfirms (n ≥ 2). Before the innovation, all firms have the same marginal cost of 70. After the innovation, one of them has a lower cost of 60. Compute how much the latter firm is willing to pay for the innovation

(d) Now assume that the market is served by Cournot duopolists who have identical marginal costs of 70 before the innovation

d1)Find the pre-innovation price and profits.

d2)Suppose that one of these firms is granted use of the innova- tion. Find the new equilibrium price and compute the profits of the two firms.

d3) How much is any of these duopolists willing to pay to acquire the innovation?

(e) Finally, from your answers above, rank the various market structures according to the incentives to innovate that they convey to firms. Comment your ranking.