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Can a larger market foster R&D under monopolistic competition with variable mark-ups?

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  • Bykadorov, Igor
  • Kokovin, Sergey

Abstract

We study monopolistic competition with symmetric directly additive preferences (generating variable mark-ups) and an endogenous technology choice. Each firm chooses an investment in R&D to decrease its marginal cost. We prove that the equilibrium R&D investment increases with market size (a larger population or trade) only if the price-elasticity of demand is an increasing function. Together with the output levels, such equilibrium investments may be socially excessive or insufficient, depending on whether the elasticity of the subutility is increasing or decreasing. The main implication is that opening up to free trade can foster R&D through variable mark-ups.

Suggested Citation

  • Bykadorov, Igor & Kokovin, Sergey, 2017. "Can a larger market foster R&D under monopolistic competition with variable mark-ups?," Research in Economics, Elsevier, vol. 71(4), pages 663-674.
  • Handle: RePEc:eee:reecon:v:71:y:2017:i:4:p:663-674
    DOI: 10.1016/j.rie.2017.10.006
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    References listed on IDEAS

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