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R&D Incentives Under Bertrand Competition: A Differential Game

Author

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  • ROBERTO CELLINI
  • LUCA LAMBERTINI

Abstract

We investigate dynamic R&D for process innovation in an oligopoly where firms invest in cost-reducing activities. We focus on the relationship between R&D intensity and market structure, proving that the industry R&D invest- ment monotonically increases in the number of firms. This result contradicts the established wisdom acquired from static games on the same topic. We also prove that, if competition is suficiently tough, any increase in product substitutability reduces R&D efforts.
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Suggested Citation

  • Roberto Cellini & Luca Lambertini, 2011. "R&D Incentives Under Bertrand Competition: A Differential Game," The Japanese Economic Review, Japanese Economic Association, vol. 62(3), pages 387-400, September.
  • Handle: RePEc:bla:jecrev:v:62:y:2011:i:3:p:387-400
    DOI: j.1468-5876.2011.00541.x
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    References listed on IDEAS

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    1. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-1137, December.
    2. Hinloopen, Jeroen, 2000. "Strategic R&D Co-operatives," Research in Economics, Elsevier, vol. 54(2), pages 153-185, June.
    3. Bester, Helmut & Petrakis, Emmanuel, 1993. "The incentives for cost reduction in a differentiated industry," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 519-534.
    4. R. Cellini & L. Lambertini, 2004. "R&D Incentives and Market Structure: A Dynamic Analysis," Working Papers 497, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Benchekroun, Hassan & van Long, Ngo, 1998. "Efficiency inducing taxation for polluting oligopolists," Journal of Public Economics, Elsevier, vol. 70(2), pages 325-342, November.
    6. repec:wsi:igtrxx:v:06:y:2004:i:04:n:s0219198904000320 is not listed on IDEAS
    7. Cellini, Roberto & Lambertini, Luca, 2009. "Dynamic R&D with spillovers: Competition vs cooperation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 568-582, March.
    8. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
    9. L. Lambertini & A. Mantovani, 2000. "Price vs Quantity in a Duopoly with Technological Spillovers: A Welfare Re-Appraisal," Working Papers 389, Dipartimento Scienze Economiche, Universita' di Bologna.
    10. Roberto Cellini & Luca Lambertini, 2004. "Private And Social Incentives Towards Investment In Product Differentiation," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 493-508.
    11. Flaherty, M Therese, 1980. "Industry Structure and Cost-Reducing Investment," Econometrica, Econometric Society, vol. 48(5), pages 1187-1209, July.
    12. repec:cor:louvrp:-1584 is not listed on IDEAS
    13. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, April.
    14. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-414, May.
    15. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-121, January.
    16. Qiu, Larry D., 1997. "On the Dynamic Efficiency of Bertrand and Cournot Equilibria," Journal of Economic Theory, Elsevier, vol. 75(1), pages 213-229, July.
    17. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
    18. Cellini, Roberto & Lambertini, Luca, 2002. "A differential game approach to investment in product differentiation," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 51-62, November.
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    Cited by:

    1. Michael Peneder & Martin Woerter, 2014. "Competition, R&D and innovation: testing the inverted-U in a simultaneous system," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 653-687, July.
    2. Raymond De Bondt & Jan Vandekerckhove, 2012. "Reflections on the Relation Between Competition and Innovation," Journal of Industry, Competition and Trade, Springer, vol. 12(1), pages 7-19, March.
    3. Cátia Felisberto, 2012. "The Relationship Between Competition and Incumbent’s Innovation," Journal of Industry, Competition and Trade, Springer, vol. 12(1), pages 21-46, March.
    4. Cátia Felisberto, 2013. "Liberalisation, competition and innovation in the postal sector," Empirical Economics, Springer, vol. 44(3), pages 1407-1434, June.

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