Technology Ladders and R&D in Dynamic Cournot Markets

Abstract

We explore optimal investment in Research and Development activities among producers in a competitive market. R&D effort is costly and results in discrete technological advances that gradually lower production costs. The aggregate cost profile is thus expressed as a stochastic multi-dimensional counting process, individually controlled by the players.Our model combines features of patent racing with dynamic market structure, capturing the interplay between the immediate competition in terms of production rates and the long-term competition in R&D.Using a Cournot model of competition with substitutable goods (e.g. markets for different energy commodities) we analyze the resulting Markov Nash equilibrium which reduces to analysis of a sequence of the one-step static games arising between R&D successes. Several numerical examples and extensive analysis of the emerging comparative statics are presented.