Efficiency of Cournot and Bertrand Equilibria with Non-cooperative and Cooperative R&D in Presence of Product Differentiation

Abstract

Strategic cooperative and non-cooperative R&D decisions are analysed in the presence of R&D spillover and product differentiation. Using a two-stage game it is shown that in both Cournot and Bertrand duopolies, R&D and output levels are larger and prices are lower under cooperative R&D agreements compared to non-cooperative R&D. For complementary and independent goods, these results are valid for any degree of R&D spillover and may hold for substitute goods even for sufficiently small R&D spillover. In terms of social welfare, cooperative R&D agreements dominate non-cooperation for both Cournot and Bertrand duopolies. As for relative efficiency of Cournot and Bertrand equilibria, it is shown that the traditional efficiency ranking may be reversed and Cournot equilibrium may dominate Bertrand equilibrium if the degree of product differentiation is low and the products are reasonably close substitutes for high degree of R&D spillover provided that R&D productivity is high. This result is stronger for cooperative R&D decision. JEL Codes: D21, D43, L13