Research Benefits in a Multimarket Setting: A Review

The literature on measuring the size and distribution of returns to research has paid increasing attention of late to questions that require a multimarket framework. These questions include the distribution of benefits among stages of a multistage process or among factors of production (i.e. the vertical incidence) and the distribution across different markets either for the same product in different places or for different products (the horizontal incidence). The latter may be regarded as including quality change which has attracted recent attention. In much of the literature, a linear elasticity modeling approach has been used to obtain measures of the consequences of research-induced supply shifts for prices and quantities which, in turn, are used to evaluate the size and distribution of welfare effects. This review summarizes the state of the art of that work. It is a selective treatment, beginning with a simple basic model of research benefits and proceeding to consider increasingly complicated problems of vertically and horizontally related markets. The recurring theme is the theoretical and empirical questions surrounding (a) how to represent technical changes, and model their effects on equilibrium displacements, in a theoretically consistent manner, and (b) how to translate those equilibrium displacement effects into welfare measures.