Dynamic Hotelling Monopoly with Product Development
I characterise R&D investment in product innovation of a profit-seeking monopolist versus that of a social planner in a spatial market, under either partial or full market coverage. Under partial coverage, the steady state product design is the outcome of the trade off between the incentive to locate as close as possible to the middle of the preference space, and the incentive to save upon R&D costs. The planner does not produce the variety preferred by the average consumer, in situations where the R&D investment is too costly. This result is reinforced under full market coverage, where the planner’s incentive to innovate is always weaker than the monopolist’s, and the planner produces the average (and median) consumer’s preferred variety if and only if the rental price of capital is nil.
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