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First-Mover Advantage in a Dynamic Duopoly with Spillover

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  • Femminis Gianluca

    (Università Cattolica del Sacro Cuore)

  • Martini Gianmaria

    (Università degli studi di Bergamo)

Abstract

We present a dynamic duopoly model of technical innovation in which R&D costs decrease exogenously with time and inter-firm knowledge spillover lowers the second comer's R&D cost. The spillover effect only becomes available after a disclosure lag. These features allow us to identify a new type of equilibrium: the leader delays investment until the R&D cost is low enough that the follower finds it optimal to invest as soon as he can benefit from the spillover. This equilibrium is subgame perfect over a wide range of parameters and raises several interesting implications. First, in our new equilibrium, the time delay between the two R&D investments is realistically short. Second, while the presence of a spillover favors the second-mover, this benefit is not enough to rule out a first-mover advantage. Indeed, the first-mover advantage survives whenever technical progress is sufficiently fast and the disclosure lag is relatively long. Third, in case of a major innovation, our equilibrium implies under-investment, which requires a substantial public intervention in favor of the investment activity.

Suggested Citation

  • Femminis Gianluca & Martini Gianmaria, 2010. "First-Mover Advantage in a Dynamic Duopoly with Spillover," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-46, November.
  • Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:49
    DOI: 10.2202/1935-1704.1658
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    Cited by:

    1. Enrico Bellino, 2012. "Pasinetti on Ricardo," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1258, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    2. Femminis, Gianluca & Martini, Gianmaria, 2011. "Irreversible investment and R&D spillovers in a dynamic duopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1061-1090, July.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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