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Transportation Technologyin a Duopoly Model of International Trade

  • A. Mantovani

In this paper I will evaluate the role of R&D investment in transport and communication in a duopoly with trade. I will in fact consider the strategic behavior of two firms located in two different countries. They can activate R&D investments in order to improve the technology of the transportation process. Transport and communication (TC) costs are of iceberg type, i.e. only a fraction of the goods shipped abroad reaches the foreign market. I will then study a game in which firms may priorly commit themselves to a certain level of R&D investment and then they play in the market. As for the market game, I will consider both a Cournot duopoly with homogeneous products and a Bertrand duopoly with differentiated goods. In both models, my analysis suggests that firms are willing to invest in transport and communication technology when such a strategy turns out to be efficient, i.e. when it does not imply an excessive cost. More precisely, a variety of equilibria will arise as a result of different levels of TC r&D efficiency. If the cost is low the game has an equilibrium in dominant strategies where both firms invest in TC and maximize the aggregate profit. As the cost increases, the game becomes a prisoner`s dilemma; both firms still invest in Tc but they do not reach the Pareto-efficient solution. For even higher levels of the cost required, the game shows an equilibrium in dominant strategies where no firms finances TC R&D and the aggregate profit is maximized.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 417.

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Date of creation: 2001
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Handle: RePEc:bol:bodewp:417
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  1. Dos Santos Ferreira, R. & Thisse, J.-F., . "Horizontal and vertical differentiation: The Launhardt model," CORE Discussion Papers RP 1216, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  3. Krugman, Paul & Venables, Anthony J, 1990. "Integration and the Competitiveness of Peripheral Industry," CEPR Discussion Papers 363, C.E.P.R. Discussion Papers.
  4. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  5. L. Lambertini & A. Mantovani & G. Rossini, 2001. "R&D in transport and comunication in a Cournot duopoly," Working Papers 401, Dipartimento Scienze Economiche, Universita' di Bologna.
  6. Bonanno, Giacomo & Haworth, Barry, 1998. "Intensity of competition and the choice between product and process innovation," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 495-510, July.
  7. Barbara J. Spencer & James A. Brander, 1982. "Strategic Commitment with R&D: The Symmetric Case," Working Papers 516, Queen's University, Department of Economics.
  8. Freeman, Chris & Louca, Francisco, 2001. "As Time Goes By: From the Industrial Revolutions to the Information Revolution," OUP Catalogue, Oxford University Press, number 9780199241071, December.
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