Research and Development with Stock-Dependent Spillovers and Price Competition in a Duopoly

Fouad Ouardighi (), Matan Shnaiderman and Federico Pasin
Additional contact information
Fouad Ouardighi: ESSEC Business School
Matan Shnaiderman: Bar-Ilan University
Federico Pasin: HEC Montréal

Journal of Optimization Theory and Applications, 2014, vol. 161, issue 2, No 17, 626-647

Abstract: Abstract This paper investigates the research and development accumulation and pricing strategies of two firms competing for consumer demand in a dynamic framework. A firm’s research and development is production-cost-reducing and can benefit from part of the competitor’s research and development stock without payment. We consider decisions in a game characterized by Nash equilibrium. In this dynamic game, a player’s action depends on whether the competitor’s current research and development stock are observable. If the competitor’s current research and development stock are not observable or observable only after a certain time lag, a player’s action can be solely based on the information on the current period t (open-loop strategy). In the converse case, it can also include the information on the competitor’s reaction to a change in the current value of the state vector (closed-loop strategy), which allows for strategic interaction to take place throughout the game. Given the cumulative nature of research and development activities, a primary goal of this paper is to determine whether, regardless of the observability of the competitor’s current research and development stock, free research and development spillovers generate a lower level of scientific knowledge than research and development appropriability. A second objective of the paper is to determine how the observability of the rival’s current research and development stock affects a firm’s research and development and pricing decisions and payoffs under imperfect research and development appropriability.

Keywords: Research and development competition; Research and development spillovers; Price competition; Duopoly market (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10957-013-0433-2

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