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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.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 10 (2010)
Issue (Month): 1 (November)
Pages: 1-46

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Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:49

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References

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  1. Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-23, December.
  2. Jason G. Cummins & Giovanni L. Violante, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 243-284, April.
  3. Miyagiwa, Kaz & Ohno, Yuka, 2002. "Uncertainty, spillovers, and cooperative R&D," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 855-876, June.
  4. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
  5. Delbono, Flavio & Denicolo, Vincenzo, 1991. "Incentives to Innovate in a Cournot Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 951-61, August.
  6. Prajit K. Dutta & Saul Lach & Aldo Rustichini, 1993. "Better Late Than Early: Vertical Differentiation in the Adoption of a New Technology," NBER Working Papers 4473, National Bureau of Economic Research, Inc.
  7. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February.
  8. Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
  9. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August.
  10. Heidrun C. Hoppe & Ulrich Lehmann-Grube, 2001. "Second-Mover Advantages in Dynamic Quality Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 419-433, 09.
  11. d'Aspremont, Claude & Jacquemin, Alexis, 1990. "Cooperative and Noncooperative R&D in Duopoly with Spillovers: Erratum," American Economic Review, American Economic Association, vol. 80(3), pages 641-42, June.
  12. Hoppe, Heidrun C. & Lehmann-Grube, Ulrich, 2005. "Innovation timing games: a general framework with applications," Journal of Economic Theory, Elsevier, vol. 121(1), pages 30-50, March.
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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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