R&D activities of enterprises, product market leadership, and collusion

Abstract

The purpose of this study is to compare the consequences of, first, quantity leadership, and, second, price leadership competition of duopolists for their R&D investments, within the situation of a cartelized industry. Using game-theoretical approach and numerical analysis, it turns out that under quantity leadership, the R&D investments of enterprises decline with the increasing knowledge spillovers in the industry. The relative R&D expenditures of the Stackelberg follower are lower and they decline significantly faster than the R&D investments of the Stackelberg leader. Each enterprise supplies the lowest value of the final product when a research joint venture is formed, which also results in the highest market price. Under price leadership, a larger extent of knowledge spillovers in the industry leads to the reduction of R&D expenditures by both enterprises. The highest price of the final product is set when a research joint venture is formed. In a cartelized industry, the lowest values of R&D expenditures occur when there are no knowledge spillovers between enterprises, or when they form a research joint venture at the R&D stage. The highest values of R&D investments are observed for the medium values of knowledge spillovers. Performed analysis allows to conclude that tightening of cooperation in research and development between competitors creates incentives for them to fully cartelize the market.