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R&D and market structure in a horizontal differentiation framework

  • Davide Fantino

    ()

    (Bank of Italy, branch of Turin)

This paper examines the dynamic interaction between R&D and market structure in a horizontally differentiated market framework. Firms invest in R&D to modify the level of differentiation of their products, increasing their specialization and their market power. The invested resources in research are declining over time because of decreasing returns from further specialization. Prices, output and short-run profits of the firms producing differentiated products increase and move towards the higher steady state values, while production of the non-differentiated good falls; the number of firms is constant in all periods. The increasing specialization of varieties improves the overall utility of consumers. The comparison with the socially optimal solution shows that firms underinvest in R&D. Firms do not internalize the effects of their research effort on the overall level of substitutability of the other varieties and on the profits of the other firms.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 658.

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Date of creation: Jan 2008
Handle: RePEc:bdi:wptemi:td_658_08
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