The R&D investment decision game with product differentiation

This article extends the classical d'Aspremont and Jacquemin's (1988, 1990) cost-reducing R&D model with spill-overs to allow quantity-setting firms (Cournot rivalry) to play the non-cooperative R&D investment decision game with horizontal product differentiation. Unlike Bacchiega et al. (2010), who identify a parametric region – defined by the extent of technological spill-overs and the efficiency of R&D activity – in which the game is a prisoner's dilemma (self-interest and mutual benefit of cost-reducing innovation conflict), this work shows that product differentiation changes the game into a deadlock (self-interest and mutual benefit do not conflict), irrespective of the parameter scale (thus, holding also in the absence of spill-over effects). The social welfare when the degree of product differentiation is high enough and a deadlock characterises investing in cost-reducing R&D is larger than when firms do not invest in R&D, irrespective of the technological spillovers extent and the R&D activity's efficiency. These findings suggest that investing in R&D challenges the improvement of interventions aimed at favouring product differentiation. These results also hold for pricesetting firms (Bertrand rivalry).