R&D wars and the effects of innovation on the success and survivability of firms in oligopoly markets

Asher Tishler and Irena Milstein

International Journal of Industrial Organization, 2009, vol. 27, issue 4, pages 519-531

Abstract: Using a two-stage model describing the optimal R&D choice of firms operating in an oligopoly market for several substitute goods we predict a convex (U-shaped) relationship between competition and innovation; that is, innovation declines as a function of product market competitiveness up to a certain level, and rises thereafter, when competition becomes intense. In other words, firms in an oligopoly market may engage in an "R&D war" and spend excessively on R&D when product market competition is intense. We also show, among other results, that when product market competition is intense, a monopoly may exhibit higher expected welfare and, sometimes, a higher expected consumer surplus than a duopoly.

Keywords: R&; D; Oligopoly; markets; Firms'; strength; Firm; survivability (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:indorg:v:27:y:2009:i:4:p:519-531

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