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First mover advantage in a dynamic duopoly with spillover

  • Gianluca Femminis


    (DISCE, Università Cattolica)

  • Gianmaria Martini


    (Università di Bergamo)

We present a dynamic duopoly model of technical innovation where R&D costs decrease exogenously with time, and inter-firm knowledge spillover lowers the second comer's R&D cost. The spillover effect only becomes available after a disclosure lag. These features allow us to identify a new type of equilibrium: the leader delays investment until the R&D cost is low enough that the follower finds it optimal to invest as soon as he can benefit from the spillover. This equilibrium is subgame perfect over a wide range of parameters, and raises several interesting implications. First, in our new equilibrium the time delay between the two R&D investments is realistically short. Second, while the presence of a spillover favors the second mover, this benefit is not enough to rule out a first mover advantage. Indeed, the first mover advantage survives whenever technical progress is sufficiently fast and the disclosure lag is relatively long. Third, in case of a major innovation our equilibrium implies under--investment, which requires a substantial public intervention in favour of the investment activity.

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Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi with number itemq0955.

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Length: 41 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:ctc:serie6:itemq0955
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  1. Prajit K. Dutta & Saul Lach & Aldo Rustichini, 1993. "Better Late Than Early: Vertical Differentiation in the Adoption of a New Technology," NBER Working Papers 4473, National Bureau of Economic Research, Inc.
  2. Michael H. Riordan, 1992. "Regulation and Preemptive Technology Adoption," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 334-349, Autumn.
  3. Hoppe, Heidrun C. & Lehmann-Grube, Ulrich, 2005. "Innovation timing games: a general framework with applications," Journal of Economic Theory, Elsevier, vol. 121(1), pages 30-50, March.
  4. Flavio Delbono & Vincenzo Denicolo, 1988. "Incentives to Innovate in a Cournot Oligopoly," Working Papers 44, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Cummins, Jason G & Violante, Giovanni L, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," CEPR Discussion Papers 3584, C.E.P.R. Discussion Papers.
  6. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February.
  7. Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-23, December.
  8. Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
  9. repec:tpr:qjecon:v:94:y:1980:i:2:p:429-36 is not listed on IDEAS
  10. Heidrun C. Hoppe & Ulrich Lehmann-Grube, 2001. "Second-Mover Advantages in Dynamic Quality Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 419-433, 09.
  11. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Miyagiwa, Kaz & Ohno, Yuka, 2002. "Uncertainty, spillovers, and cooperative R&D," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 855-876, June.
  13. d'Aspremont, Claude & Jacquemin, Alexis, 1990. "Cooperative and Noncooperative R&D in Duopoly with Spillovers: Erratum," American Economic Review, American Economic Association, vol. 80(3), pages 641-42, June.
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