Process Innovations in a Duopoly with Two Region
Most models of duopolies with a spatial dimension refer to the 'linear' or 'circular' city. Moreover, in duopoly models with innovations, the spatial dimension is usually dropped. We bridge this gap by constructing a model with two regions, each hosting production of a differentiated quality (high and low quality). In addition, consumers are heterogeneous with different willingness to pay for quality. The analysis focuses on the incentives for process innovations which affect the unit cost of production. The model is used to analyze two common trends in the urbanization process and their effects on the incentive for process innovations. The first is increased transportation costs and worsened interregional accessibility (the result is reversed for a decrease in transportation costs). We find that such changes increase the amount of process R&D more in the region producing a low-quality good than in the region producing a high-quality good. Second, we examine the effect on optimal process R&D of moving consumers from the region producing low-quality goods to the region producing high-quality goods. This lowers the optimal amount of process R&D undertaken in the region producing the low-quality good, while it is raised in the other region.
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