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R&D-Induced Industry Polarization and Shakeouts

  • AMIR R.
  • HALMENSCHLAGER C.

We consider the standard two-stage game of R&D and Cournot competition with ex ante identical firms but depart from the literature in assuming that R&D is characterized by mildly, instead of strongly, decreasing returns to scale. We establish that only extreme R&D levels are possible at equilibrium, and that for a broad range of parameters, equilibria are asymmetric in R&D levels, possibly leading one firm to endogenously exit. This provides a simple link between returns to scale in R&D and industry polarization, including shake-outs. A novelty is that exit may be triggered by positive opportunities in a strategic setting. Given the original nature of our R&D equilibrium, a complete welfare analysis is conducted, including a possible role for R&D subsidies.

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Paper provided by ERMES, University Paris 2 in its series Working Papers ERMES with number 0802.

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Date of creation: 2008
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Handle: RePEc:erm:papers:0802
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