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R&D-induced industry polarization and shake-outs

  • Amir, Rabah
  • Halmenschlager, Christine
  • Jin, Jim

We consider the standard two-stage game of R&D and Cournot competition with ex ante identical firms but depart from the literature in assuming that R&D is characterized by mildly, instead of strongly, decreasing returns to scale. We establish that only extreme R&D levels are possible at equilibrium, and that for a broad range of parameters, equilibria are asymmetric in R&D levels, possibly leading one firm to endogenously exit. This provides a simple link between returns to scale in R&D and industry polarization, including shake-outs. A novelty is that exit may be triggered by positive opportunities in a strategic setting. Given the original nature of our R&D equilibrium, a complete welfare analysis is conducted, including a possible role for R&D subsidies.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 4 (July)
Pages: 386-398

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Handle: RePEc:eee:indorg:v:29:y:2011:i:4:p:386-398
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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