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The Effects of Process R&D in an Asymmetric Duopoly under Cournot and Supply Function Competitions

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  • Saglam, Ismail

Abstract

In this paper we attempt to explore the welfare effects of (process) R&D in an asymmetric duopoly with a homogeneous product under Cournot and supply function competitions. To this aim, we consider a two-stage perfect-information game where the duopolists compete in stage one in R&D investments and in stage two either in quantities or in supply functions. Calculating the (subgame-perfect Nash) equilibrium of this game numerically for a wide range of initial cost parameters and comparing it to the equilibrium with no R&D, we show that R&D has a positive effect on the welfares of consumers and the society as a whole. While its effect on the profits of the duopolists is also positive under the Cournot competition, it becomes negative under the supply function competition. This latter negative effect is caused by the duopolists' more aggressively investing in R&D under the supply function competition, increasing the industry output, and consequently decreasing the product price, to a harmful level for themselves. Moreover, we show that R&D always widens up the efficiency gap between the duopolists under the supply function competition, while narrowing it down under the Cournot competition.

Suggested Citation

  • Saglam, Ismail, 2018. "The Effects of Process R&D in an Asymmetric Duopoly under Cournot and Supply Function Competitions," MPRA Paper 86385, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:86385
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    File URL: https://mpra.ub.uni-muenchen.de/86385/1/MPRA_paper_86385.pdf
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    References listed on IDEAS

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    1. Qiu, Larry D., 1997. "On the Dynamic Efficiency of Bertrand and Cournot Equilibria," Journal of Economic Theory, Elsevier, vol. 75(1), pages 213-229, July.
    2. Jeroen Hinloopen & Jan Vandekerckhove, 2009. "Dynamic efficiency of Cournot and Bertrand competition: input versus output spillovers," Journal of Economics, Springer, vol. 98(2), pages 119-136, November.
    3. Symeonidis, George, 2003. "Comparing Cournot and Bertrand equilibria in a differentiated duopoly with product R&D," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 39-55, January.
    4. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    5. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    6. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    7. Vives, Xavier, 1985. "On the efficiency of Bertrand and Cournot equilibria with product differentation," Journal of Economic Theory, Elsevier, vol. 36(1), pages 166-175, June.
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    More about this item

    Keywords

    Duopoly; Cournot competition; supply function competition; process R&D;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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