Strategic Commitment with R&D: The Symmetric Case
When R&D takes place before the associated output is produced, imperfectly competitive firms may use R&D for strategic purposes rather than to simply minimize costs. Using a symmetric two-stage Nash duopoly model we show that such strategic use of R&D increases total R&D undertaken, increases total output, and lowers industry profits. This introduces inefficiency in that total costs are not minimized. Nevertheless, net welfare may rise if products are homogeneous, marginal costs are non-decreasing and demand is convex or linear.
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