Equal treatment and socially optimal R&D in duopoly with one‐way spillovers

Abstract

This paper examines the standard symmetric two‐period R&D model with a deterministic one‐way spillover structure: know‐how flows only from the high R&D firm to the low R&D firm (but not vice versa). Though firms are ex ante identical, one obtains a unique asymmetric equilibrium (pair) in R&D investments, leading to interfirm heterogeneity in the industry. R&D cooperation by means of a joint lab is considered and compared to the non cooperative solution. The main part of the paper provides a second‐best welfare analysis in which we show that the joint lab yields a socially optimal R&D level subject to an equal treatment (of firms) constraint, which also coincides with the noncooperative solution in the absence of spillovers. We also investigate the welfare costs of this equal treatment constraint and find that they can be quite significant.

Managerial overconfidence, overinvestment, and R&D spillover

“…That is to say, the effective cost‐reduction values of firms 1 and 2 are x 1 + βx 2 and x 2 + βx 1 , respectively. The linear form of cost‐reduction with spillover is commonly adopted in the literature (i.e., Amir, ; Chalioti, ; Cosandier et al, ; Gama et al, ; Stepanova & Tesoriere, ; Tesoriere, ). Therefore, the final product cost of firm i is c i ( x i , x j )= C − x i − βx j .…”

“…Firms usually analyze rivals' product design and innovation activity and incorporate this knowledge into their own production (Amir & Wooders, ; Amir, , Amir et al, ; Jin & Troege, , Gama et al, ). In the economic literature, Cosandier et al () focused on the performance of R&D cooperation with a joint laboratory and provided a second‐best welfare analysis when the spillover effect has a deterministic one‐way structure. Gama et al () further examined the effect of a deterministic one‐way spillover on product market competition and analyzed the impact of the spillover parameter and the cost parameter on a firm's investment level and profit.…”

Second‐best socially optimal R&D under output spillovers

“…As introduced by KMZ (also see Amir, 2000), the scenario of R&D CJ venture amounts to maximal R&D cooperation by combining, on the one hand, the research joint venture scenario and, on the other hand, full cooperation in the conduct of R&D by allowing the firms 4 The rationale behind this simplifying assumption is frequently supported by arguments advocating for equal treatment, for example, Amir (2000). For more on the interesting issue of possible asymmetric solutions and their effects, see Salant and Shaffer (1998), Cosandier et al (2017), and Dakhlia et al (2006).…”

“…As such, this paper may be seen as a counterpart to Amir et al (2019) for the AJ model, where the aim is to provide a detailed comparison between the second-best outcome and the well-known market-based scenarios for R&D conduct, including the standard noncooperative scenario, the R&D cartel, the cartelized research joint venture, and the social research joint venture. By focusing on the common specification featuring linear demand and production costs, quadratic R&D costs, and 1 A concise list of related studies encompasses works by Bacchiega et al (2010), Jin and Troege (2006), Tesoriere (2008), Cosandier et al (2017), Martin (2002), Stepanova and Tesoriere (2011), Burr et al (2013), Poyago-Theotoky (1999), Halmenschlager (2004), and Liu and Tian (2023), among others. The literature on R&D competition/cooperation has also expanded into various economic domains, including licensing (e.g., Banerjee et al, 2023;Hu et al, 2023), economic growth (e.g., Wu & Tsai, 2023), and firm organization (e.g., Cassiman & Veugelers, 2006;Chalioti, 2019).…”

Process R&D investment and social dilemmas

“…We introduce the social dilemma perspective into the broader literature on strategic behavior of firms in R&D which in turn is a straightforward continuation of the debate initiated by Schumpeter (1942) on the relationship between industry structure and incentives to undertake R&D. In the relevant following literature, cf., e.g., Spence (1984), Katz (1986), d'Aspremont andJacquemin (1988), Kamien et al (1992), Kamien and Zang (2000), Amir et al (2011), Burr et al (2013, Bourreau et al (2016), Capuano and Grassi (2019), the behavior of firms in R&D is modeled by non-cooperative games (see also Cosandier et al 2017or Amir et al 2019, in which enterprises, first, simultaneously and independently decide about their R&D investments (these decisions affect the total manufacturing costs of each enterprise), and, further, compete in the final product market according to a given (quantity or price) competition model. To be specific, our paper is directly related to works by Amir et al (2011) and Burr et al (2013), but we introduce the broader social dilemma perspective into the analysis.…”