Dynamic efficiency of Cournot and Bertrand competition: input versus output spillovers

We consider the efficiency of Cournot and Bertrand equilibria in a duopoly with substitutable goods where firms invest in process R&D that generates input spillovers. Under Cournot competition firms always invest more in R&D than under Bertrand competition. More importantly, Cournot competition yields lower prices than Bertrand competition when the R&D production process is efficient, when spillovers are substantial, and when goods are not too differentiated. The range of cases for which total surplus under Cournot competition exceeds that under Bertrand competition is even larger as competition over quantities always yields the largest producers’ surplus.     

Competition and innovation: an experimental investigation

The paper analyzes the effects of more intense competition on firms’ investments in process innovations. More intense competition corresponds to an increase in the number of firms or a switch from Cournot to Bertrand competition. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. An increase in the number of firms from two to four reduces investments, whereas a switch from Cournot to Bertrand increases investments, even though theory predicts a negative effect in the four-player case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented. However, the positive effect of moving from Cournot to Bertrand competition is more pronounced in the former case.     

BERTRAND Vs. COURNOT COMPETITION WITH UPSTREAM FIRM INVESTMENT

This paper compares Bertrand and Cournot competition in a vertical structure in which the upstream firm sets the input price and makes R&D investments. We show that from the downstream firms’ point of view, Cournot competition has the advantage of a more monopolistic effect, leading to the setting of a higher price, but has the disadvantage of inducing a lower incentive for the upstream firm to invest. On the other hand, Bertrand competition has the advantage of providing a greater incentive for the upstream firm to invest but has the disadvantage of a more competitive effect, leading to the setting of a lower price. Our main findings are as follows. First, R&D investment level is greater under Bertrand competition than under Cournot competition. Second, from the standpoint of the upstream firm and industry, Bertrand competition is more efficient than Cournot competition. Third, from the standpoint of the downstream firms, Bertrand competition is more efficient than Cournot when investment is sufficiently efficient and products are sufficiently differentiated.     

Comparing Cournot and Bertrand equilibria in an asymmetric duopoly with product R&D

We compare the Cournot and Bertrand equilibria in an asymmetric duopoly with product R&D competition. If a firm’s marginal cost is lower than that of its rival, then this firm (its rival) is referred to as the more (less) efficient firm. Under each mode of competition, there are three types of equilibria: blockaded-entry, deterred-entry, and accommodated-entry. Moreover, the presence of R&D investment makes it harder for the less efficient firm to survive. Cournot competition entails a unique equilibrium, whereas Bertrand competition may yield two equilibria. It is harder for the less efficient firm to survive under Bertrand competition than under Cournot competition. Versus Cournot competition, Bertrand competition yields higher industry output, and it shifts production from the less efficient firm to the more efficient firm. This result, together with the known size effect, explains the following three findings. First, the more efficient firm has a normal output ranking, whereas the less efficient firm may demonstrate an output reversal. Second, the more efficient firm may demonstrate a R&D reversal, whereas the less efficient firm has a normal R&D ranking (its Cournot R&D effort exceeds its Bertrand R&D effort). Third, Bertrand competition is more welfare-efficient than Cournot competition.     

Stochastic innovation and product market organization

Summary This paper analyzes how different types of product market organization affect firms' R&D investments in a stochastic innovation framework. Product market competition determines payoffs to successful and unsuccessful firms. Restrictions on the research project success probability distribution are identified that yield an invariance result for expenditure per R&D project. The impact of the number of firms (n) on the amount of market R&D is shown to be sensitive to product market organization. For a major process innovation, firms undertake more R&D projects under Cournot product market competition than under Bertrand competition, forn sufficiently large. A numerical example is used to illustrate welfare tradeoffs.Tom Lyon, Herman Quirmbach, Ferenc Szidarovszky, Mark Walker and two anonymous referees gave us helpful comments and suggestions on prior versions of this paper. Lucy Atkinson provided expert research assistance on numerical computations. Special thanks to Ted Bergstrom who gave us valuable suggestions about the first proposition.     

Multi-market interaction and decentralization of R&D decisions

In this paper, we analyse under what conditions it is profitable for a multi-divisional firm to encourage divisions to perform independent R&D, and when it is better to centralize R&D so that the level be chosen co-operatively. Under Bertrand competition, firms always centralize R&D decisions. Under Cournot competition, however, with divisions of the same firm producing substitute products, the strategic advantage of decentralizing R&D compensates the co-ordination loss when the degree of substitutability among the products is not too high; in all other cases (when products are very good substitutes or when divisions of the same firm produce complement goods) the pay-off to co-ordination is greater than the strategic advantage of decentralization. Social welfare is maximized when firms centralize R&D.     

Spillovers,product innovation and R&D cooperation: a theoretical model

ABSTRACT

We analyze the impact of post-innovation knowledge spillovers on firms’ decisions to invest and cooperate in R&D, forming a research joint venture (RJV). We study the case of two potential investors involved in a non-tournament stochastic competition for developing a new but imitable product. We propose a theoretical model where cooperation may emerge as a subgame perfect Nash equilibrium of a three-stage game. In the first stage, firms decide whether to cooperate; in the second, they decide whether to invest; and in the third, they compete. We show that firms cooperate in R&D when the spillovers are high enough and the fixed costs associated with R&D activities are low enough; however, our analysis suggests that forming an RJV may not always be socially optimal, and subsidizing R&D cooperation may not be efficient. We propose an optimal scheme of subsidies, which should be designed according to the intensity of the spillovers, the level of the R&D costs, and the probability of innovation success. Finally, we show that in the case of mergers the private incentive to invest is maximized, and firms may not need public subsidies to cooperate. When subsidies are costly, not hindering mergers may be the second-best solution.     

Innovation,licensing, and price vs. quantity competition

In this paper, we develop a differentiated duopoly model with endogenous cost-reducing R&D and review the argument on welfare effect of price and quantity competition in the presence of technology licensing. We show that, with licensing, the standard conclusion on duopoly (Singh and Vives, 1984) is completely reversed. Cournot competition induces lower R&D investment than Bertrand competition does. Moreover, Cournot competition leads to lower prices, lower industry profit, higher consumer surplus and higher social welfare than Bertrand competition.     

Advertising Subsidy and International Oligopolistic Competition

This paper examines the strategic role of advertising subsidies in a third‐country trade model in which two firms located in different countries export their products to a third country. First a basic model of advertising in oligopolistic industries is developed in which firms decide how much to invest in either predatory or cooperative advertising and then engage in product market competition either as Cournot competitors or as Bertrand competitors. It is shown that firms invest in only one form of advertising; which form they invest in depends on the relative effectiveness of the two types of advertising, the degree of product differentiation, and the form of product market competition. The paper then studies strategic industrial policy and shows that an advertising subsidy is the optimal strategic policy irrespective of the form of product market competition and the form of advertising in which firms invest.     

Process R&;D and Product Line Deletion by a Multiproduct Monopolist

Relative to single-product firms, a multiproduct monopolist can internalize the negative externalities of its R&D investments (the ``cannibalization effect') in two ways: (1) To lower R&D investment for each product; and (2) To delete some of its product lines so as to enlarge the market size for the remaining lines. It is shown that line deletion is profitable if products are close substitutes. If products are not close substitutes, the multiproduct monopolist keeps all product lines and invests less in cost-reducing R&D than single-product firms engaging in Cournot competition with product differentiation. However, it invests more in R&D than single-product firms if there are significant economies of scope in R&D, or if the oligopolistic firms can cooperate in their R&D decisions.      

Firm size and types of innovation

We propose a general theory of innovation that illustrates the relative benefits of performing process versus product R&D when firm size is endogenous. A firm's size, scope, and R&D portfolio are shown to reflect the same underlying characteristic of the firm, namely manufacturing efficiency. We demonstrate that efficient firms become larger, have greater scope, and perform more of both process and product R&D. In light of decreasing returns to R&D, this implies small firms obtain more product innovations per dollar of R&D than large firms, which is consistent with evidence we present that small firms are more innovative than large firms as they obtain more patent counts and citations per dollar of R&D.     

Biased managers with network externalities

In network industry under Cournot and Bertrand competition, we examine a model when owners of firms hire biased managers who have incorrect market demand. Contrast to previous studies, we show that (i) regardless of the strength of network externalities when consumers form the responsive and passive expectations, owners realize strategic advantage by hiring biased managers to be more aggressive under Cournot and Bertrand competition, (ii) firms prefer facing passive expectations for the weak network externalities and vice versa for the strong network exteranlities under Bertrand and Cournot competition, (iii) if the network size is sufficiently large, then the prisoner's dilemma that firms hire aggressive managers no longer exists under both competition modes. As with no delegation case, we obtain the different rankings of firms' profit depending on both network externalities and forming of expectations under Cournot and Bertrand competition.     

Multinationals,R&D and Endogenous Productivity Asymmetries

We analyze the influence of endogenous productivity asymmetries between firms, in terms of competitiveness and size, on multinational activity. In the model, productivity depends on cost-reducing R&D (research and development). We show that when firms differ on commitment power in R&D, the R&D leader, independently of being a multinational or a domestic firm, tends to invest more in R&D than the R&D follower. Because of these productivity advantages, the R&D leader can more easily become multinational. Therefore, in addition to the proximity-concentration trade-off, we identify another FDI (foreign direct investment) determinant: technological competition.     

Stakeholders’ relationships and product market competition

In this article, we study the relationships between main stakeholders (shareholders, consumers and employees) when firms are consumer oriented (CO) in the sense of caring about consumers’ interests in the objective function. We let these firms first bargain with labour union over their employees’ wages and then compete either in the quantity space (Cournot competition) or in the price space (Bertrand competition). Our model shows that taking care of the consumers’ interests when determining product market strategies may reverse the traditional ranking between Cournot and Bertrand equilibria. This implies that if shareholders in a CO firm can choose either a quantity or a price strategy, they will surprisingly choose the latter. Moreover, we show that the conflicting interests between main stakeholders are attenuated under Bertrand competition compared to Cournot competition.     

Strategic timing in R&D agreements

We study the endogenous formation of R&D agreements in a R&D/Cournot duopoly model with spillovers where also the timing of R&D investments is endogenous. This allows us to consider the incentives for firms to sign R&D agreements over time. It is shown that, when both R&D spillovers and investment costs are sufficiently low, firms may find difficult to maintain a stable agreement due to the strong incentive to invest noncooperatively as leaders. In this case, the stability of an agreement requires that the joint investment occurs at the initial stage, thus avoiding any delay. When spillovers are sufficiently high, the coordination of R&D efforts becomes a profitable option, although firms may also have an incentive to sequence noncooperatively their investment over time. Finally, when spillovers are asymmetric and knowledge mainly leaks from the leader to the follower, investing as follower may become extremely profitable, making R&D agreements hard to sustain unless firms strategically delay their joint investment in R&D.     

R&D cooperation with scientific institutions: a difference-in-difference approach

Economists and business managers have long been interested in the impact of research and development (R&D) cooperation with scientific institutions on the innovation performance of firms. Recent research identifies a positive correlation between these two variables. This paper aims to contribute to the identification of the relationship between R&D cooperation with scientific institutions and the product and process innovation performance of firms by using a difference-in-difference approach. In doing so, we distinguish between two different types of scientific institutions: universities and governmental research institutes. For the econometric analyses, we use data from the German Community Innovation Survey. In total, data from up to 560 German service and manufacturing firms are available for the difference-in-difference analyses. The results suggest that R&D cooperation with universities and governmental research institutes has a positive effect on both product innovation and process innovation performance of firms.     

Effects of coordinated strategies on product and process R&;D

Using a game theoretical model on firms’ simultaneous investments in product and process R&D, we advance and empirically test hypotheses on the role of externalities on the optimal R&D portfolio of cooperating firms and independently competing firms. We use Community Innovation Survey data on 3,696 Italian manufacturing firms. In line with our model we find that members of a group of firms invest significantly more into product, process, and aggregate R&D than independent firms. Further, their R&D portfolios tend to show a higher product versus process ratio. However, with regard to R&D performance and efficiency we find that independent firms are superior.      

Vertical R&D Spillovers,Cooperation, Market Structure,and Innovation

This paper studies vertical R&D spillovers between upstream and downstream firms. The model incorporates two vertically related industries, with horizontal spillovers within each industry and vertical spillovers between the two industries. Four types of R&D cooperation are studied: no cooperation, horizontal cooperation, vertical cooperation, and simultaneous horizontal and vertical cooperation. Vertical spillovers always increase R&D and welfare, while horizontal spillovers may increase or decrease them. The comparison of cooperative settings in terms of R&D shows that no setting uniformly dominates the others. Which type of cooperation yields more R&D depends on horizontal and vertical spillovers, and market structure. The ranking of cooperative structures hinges on the signs and magnitudes of three "competitive externalities" (vertical, horizontal, and diagonal) which capture the effect of the R&D of a firm on the profits of other firms. One of the basic results of the strategic investment literature is that cooperation between competitors decreases R&D when horizontal spillovers are low; the model shows that this result does not necessarily hold when vertical spillovers are sufficiently high, and/or when horizontal cooperation is combined with vertical cooperation.     

Symbiotic Production and Optimal Export Policy

This paper constructs a two‐country trade model to examine the optimal policies relating to the export of final and intermediate products under Cournot as well as Bertrand competition when firms engage in symbiotic production internationally. The paper shows that given linear demand for the final product, the optimal export policies are to tax the exports of both the final and intermediate goods under symbiotic production, regardless of whether firms engage in Cournot or Bertrand competition in the final good market, which is contrary to the conventional wisdom.     

PROFITABLE STRATEGIC DELEGATION WITH CONJECTURAL VARIATIONS

Firms delegate strategic decisions to managers because they find it profitable to do so. In the product market, when agents make conjectures about the reaction of their rivals to marginal changes in their own strategies, the set of equilibriums can be enlarged with respect to the case of no conjectures. This paper takes a duopolistic linear market parameterization where firms selling differentiated products can delegate either price or output decisions to managers. We show that it is a dominant strategy for firms to delegate no matter whether firms are Cournot or Bertrand competitors, although the equilibrium is not necessarily efficient. Futhermore, in equilibrium Cournot competition is more profitable for firms than Bertrand competition. Finally, requiring consistency in conjectures yields the same outcome no matter what type of strategic interaction and managerial choice there is on the part of firms.