Product and process innovation in a differentiated goods duopoly

Abstract

This paper compares Bertrand and Cournot equilibria in a differentiated duopoly with R&D competition or cooperation, where R&D may affect both unit cost of production and the size of the market. This combination of product and process innovation is shown to allow for the reversal of some results found in earlier models that only look at one of the two types of R&D effects. We find that for a sufficiently negative demand effect of R&D, the Bertrand equilibrium will give the highest R&D effort. Furthermore, expanding upon existing models, we illustrate how including demand effects of R&D and product differentiation, increases the scope for R&D to be larger when firms cooperate in their R&D. We also show how quantity competition in the product market is more likely to secure greater R&D levels under cooperation between the firms than price competition does, ceteris paribus.