R&D Competition in an Asymmetric Cournot Duopoly: The Welfare Effects of Catch-Up by the Laggard Firm

Posted by D. Daniel Sokol

Ben Ferrett (School of Business and Economics, Loughborough University, UK) has posted R&D Competition in an Asymmetric Cournot Duopoly: The Welfare Effects of Catch-Up by the Laggard Firm.

ABSTRACT: The substantial within-industry variation in firm productivity typically observed in the data suggests that there is ample scope for catch-up by laggard firms. We analyse the normative effects of such catch-up. In the short run, where firms’ process technologies are fixed, catch-up can reduce social welfare if the initial unit-cost gap between firms is sufficiently large (the Lahiri/Ono effect). However, in the long run, where firms invest in process R&D to maximize profits, social welfare jumps upwards following catch-up if it causes the major firm’s R&D spending lead to grow. Both qualitative insights appear quite general.