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Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, April 24, 2013

R&D Competition Versus R&D Cooperation in Oligopolistic Markets with Evolving Structure

Posted by D. Daniel Sokol

Herbert Dawid, University of Bielefeld - Department of Business Administration and Economics, Peter M. Kort, Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER) and Michael Kopel, University of Graz R&D discuss Competition Versus R&D Cooperation in Oligopolistic Markets with Evolving Structure.

ABSTRACT: This paper considers investment behavior of duopolistic firms subject to technological progress. It is assumed that initially both firms offer a homogeneous product, but after a stochastic waiting time they are able to realize a product innovation. Production capacities of both firms are product specific. It is shown that firms anticipate a future product innovation by under-investing (if the new product is a substitute to the established product) and higher profits, and over-investing (in case of complements) and lower profits, compared to the corresponding standard capital accumulation game. This anticipation effect is stronger in the case of R&D cooperation. Furthermore, since due to R&D cooperation firms introduce the new product at the same time, this leads to intensified competition and lower firm profits right after the new product has been introduced. In addition, we show that under R&D competition the firm that innovates first, overshoots in new-product capacity buildup in order to exploit its temporary monopoly position. Taking into account all these effects, the result is that, if the new product is neither a close substitute nor a strong complement of the established product, positive synergy effects in R&D cooperation are necessary to make it more profitable for firms than R&D competition.

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