R&D Competition in a Mixed Duopoly under Uncertainty and Easy Imitation

Abstract

A well established result in the R&D literature is that when imitation is easy there will be generally underinvestment due to the free-rider problem. This paper shows that a public firm can be used in tackling the problem of underinvestment. We find that (i) in a mixed duopoly the public firm invests more in R&D than the private firm, (ii) in the mixed duopoly the private firm reduces its R&D investment relative to the private duopoly, while the public firm spends relatively more in R&D, (iii) relative to the social optimum, in the mixed duopoly the public firm overinvests while the private firm underinvests in R&D. A social welfare comparison between the private and the mixed duopoly proves ambiguous. By way of an example, using a quadratic R&D function, we show that depending on the size of the innovation, social welfare in the mixed duopoly can be higher than in the private duopoly.J. Comp. Econom.,September 1998, 26(3), pp. 415–428. University of Nottingham, University Park, Nottingham NG7 2RD, England.