R&D Investments under Bertrand Competition
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We study firms’ incentives to invest in R&D when they produce homogeneous goods and engage in Bertrand competition. In the model, the firms can reduce their marginal costs through R&D before competing in the market by setting the prices of their goods. We find that if the firms make non-randomized choices on their R&D investments in equilibrium, only one firm invests in R&D and supplies goods to the entire market. If the firms are allowed to randomize their R&D investment choices, all firms invest in R&D with probability one in any (symmetric) equilibrium. In addition, if firms’ R&D investment costs are sufficiently low, there is a positive probability that all firms make the maximum R&D investment and share the market. The paper also analyzes how R&D spillovers and the number of competing firms affect firms’ R&D investment incentives, and compares the R&D behavior of firms under Bertrand and Cournot competition.
Abstract
We study firms’ incentives to invest in R&D when they produce homogeneous goods and engage in Bertrand competition. In the model, the firms can reduce their marginal costs through R&D before competing in the market by setting the prices of their goods. We find that if the firms make non-randomized choices on their R&D investments in equilibrium, only one firm invests in R&D and supplies goods to the entire market. If the firms are allowed to randomize their R&D investment choices, all firms invest in R&D with probability one in any (symmetric) equilibrium. In addition, if firms’ R&D investment costs are sufficiently low, there is a positive probability that all firms make the maximum R&D investment and share the market. The paper also analyzes how R&D spillovers and the number of competing firms affect firms’ R&D investment incentives, and compares the R&D behavior of firms under Bertrand and Cournot competition.