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Can a larger market foster R&D under monopolistic competition with variable mark-ups?

Igor Bykadorov () and Sergey Kokovin

Research in Economics, 2017, vol. 71, issue 4, 663-674

Abstract: We study monopolistic competition with symmetric directly additive preferences (generating variable mark-ups) and an endogenous technology choice. Each firm chooses an investment in R&D to decrease its marginal cost. We prove that the equilibrium R&D investment increases with market size (a larger population or trade) only if the price-elasticity of demand is an increasing function. Together with the output levels, such equilibrium investments may be socially excessive or insufficient, depending on whether the elasticity of the subutility is increasing or decreasing. The main implication is that opening up to free trade can foster R&D through variable mark-ups.

Keywords: R&D investments; Trade and efficiency; Monopolistic competition; Variable mark-ups; Trade gains (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.rie.2017.10.006

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