No abstract

The amount of cost-reduction or effective R&D that results in a symmetric sequential Nash equilibrium with quadratic payoffs and differentiated goods, is shown to increase with spillovers in "small group" industries and to achieve a maximum for spillovers that are not perfect in "large group" industries. Similar tendencies apply for consumer surplus, profits and static welfare. More rivals typically lead to reduced investments, output and profitability, while consumer surplus and welfare increase, or at least do not decrease. Limited entry in small groups may enhance innovative investments, profitability and consumer surplus, if only product differentiation, R&D efficiency and spillovers are sufficiently high. Too many rivals will then again lead to reductions and a decrease in static welfare. JEL Classification: 022, 611, 621.

The taxonomy of situations leading firms to strategically over-or underinvest in sunk variables such as research and development or advertising, is reexamined to take into account externalities which typically accompany these investment patterns.The influence of positive or negative spillovers on rival firms, on the optimal level of strategic investment is analyzed, where through the use of quadratic objective functions explicit solutions are computed, as well as implications for profits and welfare. The strategic taxonomy is further used to pinpoint situations under which cooperative ventures mitigate the under-or overinvestment outcome. Introduction.Business firms often improve on their competitive advantage through strategic investments in, for example, research and development, capacity, product quality and diversity, vertical integration, and advertising and distribution. The strategic nature of these investments

The members of a research joint venture (RJV) cartel coordinate strategic R&D investments and improve the transfer of technological information. Outsiders compete against the cartel and against each other. All industry members receive industry-wide spillovers and compete in output. With linear demand, constant unit production cost and diminishing returns on innovative efforts, it is possible to compute the strategic investments of members and outsiders. Even in industries with small spillovers, RJV members will spend more on R&D than outsiders provided they sufficiently improve information sharing. Better information sharing enhances investment levels of the RJV members as well as the profitability of joining and staying with the cartel. As a consequence consumer surplus and static welfare is also enhanced Static welfare and consumer surplus ~ncrease with the size of the RJV in industries with few firms and large spillovers. Otherwise they first increase and then decrease as the membership expands.

No abstract