Abstract
This paper investigates the R&D (research and development) risk choices of private and public firms in a product differentiated mixed duopoly market. Using the canonical models of R&D risk choice in a mixed market, it compares market performances between Cournot and Bertrand. The main findings are (i) public firm always engages in higher R&D risks than private firm under Cournot, (ii) public firm mostly chooses higher R&D risks, but may choose lower R&D risks than private firm if the degree of product substitution is sufficiently large under Bertrand, (iii) both public and private firms are more willing to take R&D risks under Bertrand than under Cournot, and (iv) from the perspective of social welfare, private firm always assumes too low R&D risks under Cournot. However, it takes excessive risks if the degree of product substitution is large enough under Bertrand.
Highlights
In most countries, state-owned public firms and private firms coexist and compete against each other in industries such as telecommunication, postal service, transportation, automobile, steel, television, banking, housing, health care, insurance, education and so on (Matsumura & Tomaru, 2015)
The main findings are (i) public firm always engages in higher R&D risks than private firm under Cournot, (ii) public firm mostly chooses higher R&D risks, but may choose lower R&D risks than private firm if the degree of product substitution is sufficiently large under Bertrand, (iii) both public and private firms are more willing to take R&D risks under Bertrand than under Cournot, and (iv) from the perspective of social welfare, private firm always assumes too low R&D risks under Cournot
The author compares the R&D incentives of two firms under Cournot competition, and finds that in equilibrium the public firm always engages in higher R&D risks than the private firm under Cournot competition
Summary
This study examines strategic R&D risk choice when the private and public firms compete in differentiated industries. The aim of R&D is to increase market demand In this stage, given a series of R&D programmes with different risk levels but an identical expected outcome, the firms choose the type of their R&D programmes (i.e., determine the R&D risk level). The private and public firms choose quantities (or prices) and compete in product market. This study mainly finds that: (i) in equilibrium the R&D risk level of the public firm is always higher than that of the private firm under Cournot competition.
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