Entry Deterrence Through Fixed Cost-Reducing R&D
AbstractThe paper explores the role of R&D investments reducing fixed production costs in entry deterrence. An incumbent monopolist performs R&D to reduce its fixed production costs. There is a potential entrant, which can also perform R&D for the same purpose. There are bidirectional technological spillovers between the incumbent and the potential entrant. It is shown that deterrence, which takes the form of underinvestment in R&D by the incumbent, is more likely when the spillover from the incumbent to the potential entrant is high, when the spillover from the potential entrant to the incumbent is low, and when the fixed cost is intermediate. The comparative statics of the model depend heavily on which of two cases obtains: the first case is when separation between deterrence and accommodation is dictated by the relative profitability of these strategies; the second case is when separation between these two strategies is dictated by the positivity of R&D investments. The role of two policy tools, R&D subsidies and intellectual property protection, is examined. R&D subsidies, while they generally facilitate entry, move R&D investments in socially undesirable directions, except when accommodation is the equilibrium with and without the subsidy. As for intellectual property rights, they have no effect on R&D investments (except under deterrence) and tend to reduce entry.
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Bibliographic InfoPaper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0605E.
Length: 21 pages
Date of creation: 2006
Date of revision:
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Entry deterrence; Fixed costs; R&D; R&D spillovers;
Other versions of this item:
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
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