R&D investment under spatial price discrimination

This paper uniquely examines an R&D rivalry under spatial price discrimination and compares two alternative timings. When firms invest first, they locate efficiently but overinvest in cost‐reducing R&D if spillover is modest. When firms locate first, they locate inefficiently and always underinvest in cost‐reducing R&D. Although the R&D investment improves social welfare under either timing, profit always declines and so it would never be undertaken if firms cooperate. Both timings are relevant as we identify circumstances under which each will endogenously be chosen in a premarket stage. Critically, the equilibrium timing is often not the socially beneficial timing.