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2020 | OriginalPaper | Chapter

13. Impact of R&D Cartelization with Endogenous Product Differentiation

Author : Bartlomiej Wisnicki

Published in: Advances in Cross-Section Data Methods in Applied Economic Research

Publisher: Springer International Publishing

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Abstract

We analyze the multistage model of a duopoly in which firms decide on the level of product differentiation, R&D investment and production. The decision of differentiation is strongly related to the cost-reducing technology spillover. We find that there is a positive relationship between the level of substitution and R&D investment, which transfers into higher production and lower market price. The critical aspect of the paper is the welfare analysis of the cartelization in the market. We show that cooperation in R&D investment coordinates high investment with closer substitution, and it increases both firms profits and consumer welfare. Moreover, from the consumers’ perspective, the total monopolization of the market is more efficient scenario than a fully competitive one. Hence, the gains from coordinated joint research far outlast the possible loss from monopolization of the market.

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Appendix
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Footnotes
1
For modeling reasons (mainly having a similar cost function that in original works), we assume that firms decide on the level of spillover and that level is transformed into substitution ratio by function h. However, as the economic context and real possibility seems more plausible in assuming that firms decide on the scope of differentiation, we will refer to that decision process in that manner.
 
2
In that case, it is a situation of a monopolist operating on two horizontally differentiated markets with two separate (but not entirely due for spillover) production facilities.
 
3
We can, without a loss in generality, reverse this logic and state that firms choose how distinct their products are and given that they will try to obtain as much spillover as possible. Both principles would lead to the same conclusions.
 
4
It shall be noted, that while there is no general proof to that statement, the following results are robust to the changes in the listed parameters’ values.
 
5
Note that since the marginal cost of R&D investment is increasing, it is optimal to allocate the total R&D investment between the firms equally.
 
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Metadata
Title
Impact of R&D Cartelization with Endogenous Product Differentiation
Author
Bartlomiej Wisnicki
Copyright Year
2020
Book
Advances in Cross-Section Data Methods in Applied Economic Research

Print ISBN: 978-3-030-38252-0

Electronic ISBN: 978-3-030-38253-7

Copyright Year: 2020

DOI
https://doi.org/10.1007/978-3-030-38253-7_13

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