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The R&D investment decision game with product differentiation

Author

Listed:
  • Domenico Buccella
  • Luciano Fanti
  • Luca Gori
Abstract
This article extends the classical d'Aspremont and Jacquemin's (1988, 1990) cost-reducing R&D model with spill-overs to allow quantity-setting firms (Cournot rivalry) to play the non-cooperative R&D investment decision game with horizontal product differentiation. Unlike Bacchiega et al. (2010), who identify a parametric region – defined by the extent of technological spill-overs 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), irrespective of the parameter scale (thus, holding also in the absence of spill-over effects). The social welfare when the degree of product differentiation is high enough and a deadlock characterises investing in cost-reducing R&D is larger than when firms do not invest in R&D, irrespective of the technological spillovers extent and the R&D activity's efficiency. These findings suggest that investing in R&D challenges the improvement of interventions aimed at favouring product differentiation. These results also hold for pricesetting firms (Bertrand rivalry).

Suggested Citation

  • Domenico Buccella & Luciano Fanti & Luca Gori, 2021. "The R&D investment decision game with product differentiation," Discussion Papers 2021/278, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    • Handle: RePEc:pie:dsedps:2021/278
    Note: ISSN 2039-1854
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    File URL: https://www.ec.unipi.it/documents/Ricerca/papers/2021-278.pdf
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    References listed on IDEAS

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    Cited by:

    1. Buccella, Domenico & Fanti, Luciano & Gori, Luca, 2023. "The disclosure decision game: Subsidies and incentives for R&D activity," Mathematical Social Sciences, Elsevier, vol. 125(C), pages 11-26.
    2. Buccella, Domenico & Fanti, Luciano & Gori, Luca, 2021. "A contribution to the theory of R&D investments," GLO Discussion Paper Series 940, Global Labor Organization (GLO).
    3. Buccella, Domenico & Fanti, Luciano & Gori, Luca, 2023. "Optimal R&D disclosure in network industries," Economic Systems, Elsevier, vol. 47(4).
    4. Colombo, Stefano & Lambertini, Luca, 2023. "R&D investments with spillovers and endogenous horizontal differentiation," Regional Science and Urban Economics, Elsevier, vol. 98(C).

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    More about this item

    Keywords

    Process innovation; Nash equilibrium; Social welfare;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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