Transportation price, product differentiation, and R&D in an oligopoly

Abstract

In this article, we construct an international oligopoly that explicitly incorporates transporter behavior. In each country, there is one firm that produces differentiated goods and invests in product-differentiating R&D and one transporter that transports the differentiated goods. We adopt a three-stage game in which the firms decide their R&D investment level to determine the degree of horizontal differentiation, the transporters determine the transportation prices through Cournot competition, and then the firms determine the quantities of production. We find that an increase in R&D efficiency in the product differentiation of firms leads to a decrease in transportation prices. We also reveal that an increase in the efficiency of product differentiation always reduces the profits of firms. These results explain the empirically plausible long-term trend of declining transportation prices and also provide a counterintuitive implication that efficiency gains reduce the degree of product differentiation.