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Too much R&D? – vertical differentiation and monopolistic competition

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  • Jan Kranich

Abstract

Purpose - This paper aims to discuss whether product research and development (R&D) in developed economies tends to be too high compared with the socially desired level. Design/methodology/approach - In this context, a model of vertical and horizontal product differentiation within the Dixit-Stiglitz framework of monopolistic competition is set up. Firms compete in horizontal attributes of their products, and also in quality that can be controlled by R&D investments. Findings - The paper reveals that in monopolistic-competitive industries, R&D intensity is positively correlated with market concentration. Furthermore, welfare and policy analysis demonstrate an overinvestment in R&D with the result that vertical differentiation is too high and horizontal differentiation is too low. The only effective policy instrument in order to contain welfare losses is a price control of R&D services. Originality/value - Considering the extent of product R&D as well as the political efforts to promote public and private research, this paper scrutinizes its benefit incorporating income and employment effects. Thus, it goes beyond partial-analytical models of the existing industrial organization literature and provides a larger base of political analysis.

Suggested Citation

  • Jan Kranich, 2009. "Too much R&D? – vertical differentiation and monopolistic competition," Journal of Economic Studies, Emerald Group Publishing, vol. 36(6), pages 641-659, October.
  • Handle: RePEc:eme:jespps:v:36:y:2009:i:6:p:641-659
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