The R&D Investment Decision Game with Product Differentiation

Author:

Buccella Domenico1ORCID,Fanti Luciano2,Gori Luca3ORCID

Affiliation:

1. Department of Economics , Kozminski University , Jagiellońska Street, 57/59, 03301 Warsaw , Poland

2. Department of Economics and Management , University of Pisa , Via Cosimo Ridolfi, 10, I–56124 Pisa (PI) , Italy

3. Department of Law , University of Pisa , Via Collegio Ricci, 10, I–56126 Pisa (PI) , Italy

Abstract

Abstract This article extends the cost-reducing R&D model with spillovers by d’Aspremont and Jacquemin (1988. “Cooperative and Noncooperative R&D in Duopoly with Spillovers.” The American Economic Review 78: 1133–7, 1990. “Cooperative and Noncooperative R&D in Duopoly with Spillovers: Erratum.” The American Economic Review 80: 641–2) to allow quantity-setting firms (Cournot rivalry) to play the non-cooperative R&D investment decision game with horizontal product differentiation. Unlike Bacchiega, Lambertini, and Mantovani (2010. “R&D-hindering Collusion.” The B.E. Journal of Economic Analysis & Policy 10 (Topics): 66), who identify a parametric region (defined by the extent of technological spillovers and the efficiency of R&D activity), in which the game is a prisoner’s dilemma (self-interest and mutual benefit of cost-reducing innovation conflict), this work shows that product differentiation changes the game into a deadlock (self-interest and mutual benefit do not conflict), regardless of the parameter scale (i.e. also in the absence of spill-over effects). Then investing in R&D challenges the improvement of interventions aimed at favouring product differentiation. This is because social welfare when firms invest in cost-reducing R&D is greater than when firms do not invest in R&D. Alternatively, R&D subsidies can be used as a social welfare maximising tool also in the absence of R&D spillovers. These results also hold for price-setting firms (Bertrand rivalry).

Funder

Institutions, imperfect markets, and policy problems, Università di Pisa.

Infectious diseases, health, and development: economic and legal effects, Università di Pisa.

Publisher

Walter de Gruyter GmbH

Subject

General Economics, Econometrics and Finance

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