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

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  • Ben Ferrett

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    (School of Business and Economics, Loughborough University, UK)

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    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.

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    File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Ferrett_WP2012_5.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2012_05.

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    Date of creation: Apr 2012
    Date of revision: Apr 2012
    Handle: RePEc:lbo:lbowps:2012_05

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    Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html
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    Related research

    Keywords: asymmetric duopoly; catch-up; social welfare; process R&D.;

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    1. Rachel Griffith & Stephen Redding & Helen Simpson, 2004. "Foreign Ownership and Productivity: New Evidence from the Service Sector and the R&D Lab," CEP Discussion Papers dp0649, Centre for Economic Performance, LSE.
    2. Greg Shaffer & Stephen W. Salant, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, vol. 89(3), pages 585-604, June.
    3. Tandon, Pankaj, 1984. "Innovation, Market Structure, and Welfare," American Economic Review, American Economic Association, vol. 74(3), pages 394-403, June.
    4. Mills, David E. & Smith, William, 1996. "It pays to be different: Endogenous heterogeneity of firms in an oligopoly," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 317-329, May.
    5. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December.
    6. Donald Smythe & Jingang Zhao, 2006. "The Complete Welfare Effects of Cost Reductions in a Cournot Oligopoly," Journal of Economics, Springer, vol. 87(2), pages 181-193, 03.
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