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The road not taken: competition and the R&D portfolio

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  • Letina, Igor
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    Abstract

    This paper develops an innovation model where firms choose which research paths to follow. Contrary to most of the literature which focuses only on the level of investment in innovation, this model captures both the variety of research paths undertaken and the amount of duplication of research. A characterization of the equilibrium market portfolio is provided. It is shown that an increase in the number of firms weakly increases the variety of developed projects and weakly increases the amount of duplication of research. An increase in the intensity of competition among firms leads to an increase in the variety of developed projects and a decrease in the amount of duplication of research. A characterization of the socially optimal portfolio is provided. It is shown under which conditions market suboptimally invests in the variety and duplication of research projects. Market underinvestment in the variety of R&D projects is demonstrated for a large class of homogeneous goods products. --

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    Bibliographic Info

    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79871.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79871

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    1. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
    2. Kaylan Chatterjee & Robert Evans, 2004. "Rivals' Search for Buried Treasure: Competition and Duplication in R&D," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 160-183, Spring.
    3. Raaj Kumar Sah & Joseph E. Stiglitz, 1986. "The Invariance of R&D to the Number of Firms in the Industry," NBER Working Papers 1798, National Bureau of Economic Research, Inc.
    4. Tor Klette & David de Meza, 1986. "Is the Market Biased Against Risky R&D?," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 133-139, Spring.
    5. Herman C. Quirmbach, 1993. "R&D: Competition, Risk, and Performance," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 157-197, Summer.
    6. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
    7. Tandon, Pankaj, 1984. "Innovation, Market Structure, and Welfare," American Economic Review, American Economic Association, vol. 74(3), pages 394-403, June.
    8. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
    9. Reynolds, Stanley S & Isaac, R Mark, 1992. "Stochastic Innovation and Product Market Organization," Economic Theory, Springer, vol. 2(4), pages 525-45, October.
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