A Differential Game Analysis of the Firms’ Process Innovation with Technological Spillover Under Different Market Structures in a Duopoly Market

Abstract

In this paper, we formulated a dynamic game model of the firms’ process innovation with technological spillover under different market structures (market competition intensity) in a duopoly market, in which the firms are concerned about relative profits as well as their own profits and investigated the relationship between the degree of competitiveness faced by the firms and their R&D expenditure. Our results showed that, under certain conditions, the system always admits saddle point steady-state equilibrium under independent ventures and R&D cartel games, respectively, and although the process innovation investment under R&D cartel is higher than that under the independent ventures, whether the marginal production cost under R&D cartel is less (higher) than that under the independent ventures depends on the degree of technological R&D spillover and the market competition intensity. Furthermore, the marginal production cost under independent ventures is not monotonically decreasing with spillover for the given region of market competition intensity; while the marginal production cost under R&D cartel game always monotonically decreases with spillover for any market competition intensity.