The R&D Investment Decision Game with Product Differentiation

Domenico Buccella, Luciano Fanti and Luca Gori ()

The B.E. Journal of Theoretical Economics, 2023, vol. 23, issue 2, 601-637

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).

Keywords: process innovation; Nash equilibrium; social welfare (search for similar items in EconPapers)
JEL-codes: D43 L13 O31 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Working Paper: The R&D investment decision game with product differentiation (2021)
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DOI: 10.1515/bejte-2021-0129

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