Private and Social Incentives Towards Investment in Product Differentiation
We consider a dynamic oligopoly where firms invest to increase product differentiation and an externality effect operates in the R&D activity. We compare the steady state solutions under alternative decision rules, namely, the open-loop and the closed-loop Nash equilibrium. Significant differences emerge, concerning the effect of the number of firms upon the optimal degree o product differentiation. We also compare the private optima with the social optimum, and derive implications concerning the social desirability of different decision rules.
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