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Firms' Choice of R&D Intensity in the Presence of Aggregate Increasing Returns to Scale

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  • Fölster, Stefan

    (Research Institute of Industrial Economics (IFN))

Abstract

When firms possess unique R & D assets such as ideas or particular researchers, and there are aggregate increasing returns to scale in R & D, then there can be several Nash equilibria involving different levels of investment in R & D. However when costless communication is possible firms may be able to coordinate a move towards a pareto-preferred equilibrium provided that the communication is credible. It is shown that in some cases when firms do not move to a pareto-preferred equilibrium in spite of communication one firm may have an incentive to purchase R & D assets from other firms to reap the gain from moving to a high R & D-intensity equilibrium. In the absence of common knowledge however it is not clear whether players will choose strategies that lead to Nash equilibria. Two hypotheses in this case are that communication is much less useful and that the concentration of R & D assets influences players entry decision. These hypotheses are confirmed in a laboratory experiment.

Suggested Citation

  • Fölster, Stefan, 1989. "Firms' Choice of R&D Intensity in the Presence of Aggregate Increasing Returns to Scale," Working Paper Series 211, Research Institute of Industrial Economics.
  • Handle: RePEc:hhs:iuiwop:0211
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    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Schnee, Jerome E., 1978. "Government programs and the growth of high-technology industries," Research Policy, Elsevier, vol. 7(1), pages 3-24, January.
    3. William Novshek, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 473-486.
    4. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    R&D; Nash equilibria; coordination; Pareto-preferred outcome; communication;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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