Comparing Cournot and Bertrand equilibria in a differentiated duopoly with product R&D

Abstract

This paper compares Bertrand and Cournot equilibria in a differentiated duopoly with substitute goods and product R&D. I find that R&D expenditure, prices and firms' net profits are always higher under quantity competition than under price competition. Furthermore, output, consumer surplus and total welfare are higher in the Bertrand equilibrium than in the Cournot equilibrium if either R&D spillovers are weak or products are sufficiently differentiated. If R&D spillovers are strong and products are not too differentiated, then output, consumer surplus and total welfare are lower in the Bertrand case than in the Cournot case. Thus a key finding of the paper is that there are circumstances where quantity competition can be more beneficial than price competition both for consumers and for firms.

Dynamic efficiency of Cournot and Bertrand competition: input versus output spillovers

“…As a result, total surplus under Cournot competition can exceed total surplus under Bertrand competition, despite the fact that prices under Bertrand competition are always lower than under Cournot competition (Qiu 1997). For product R&D similar results apply although here the higher welfare under Cournot competition is due to higher product quality which directly enhances consumers' surplus (Symeonidis 2003).…”

“…This research can be aimed at lowering production costs (Qiu 1997), or at increasing product quality (Symeonidis 2003). Again the welfare comparison may be reversed as under Cournot competition incentives to invest in R&D are higher than under Bertrand competition.…”

Timing of technology adoption and product market competition

“…The findings of this literature are quite mixed. For instance, Qiu (1997), Symeonidis (2003 and Hinloopen and Vandekerckhove (2007), considering an oligopolistic market, have demonstrated that a shift from a more competitive market characterized by Bertrand competition to a less competitive market with Cournot competition can reinforce firms' incentives to 1 Reinganum (1989) and Hoppe (2001) provide an excellent survey of this literature. 3 invest in R&D. Sacco (2008) and Tishler and Milstein (2009), also considering an oligopolistic market but using product substitutability as a measure of competition, have found that there is a U-shaped relationship between competition and firms' investments in cost-reducing R&D. Aghion et al (2006) instead, in a general equilibrium setting where competition is measured in terms of the Lerner index, have concluded that there is an inverted U-shaped relationship between competition and innovation.…”

OPTIMAL POLICY FOR PRODUCT R&D WITH ENDOGENOUS QUALITY ORDERING: ASYMMETRIC DUOPOLY*

“…Although symmetric duopoly (Aoki, 2003;Aoki and Prusa, 1997;Jinji, 2003) and asymmetric duopoly with a large technology gap (Park, 2001; Zhou et al, 2002) have been 1 Symeonidis (2003a) points out that product R&D directly affects the consumer surplus, whereas process R&D affects it only indirectly. Product R&D directly affects consumers' utility because it improves product quality.…”

“…Process R&D reduces marginal production costs and hence affects consumers' utility only indirectly through an increase in output. Recent works on product R&D include Symeonidis (2003a), Bonanno and Haworth (1998), and Lin and Saggi (2002). 2 Scherer and Ross (1990) note that about three-quarters of R&D expenditure by firms in the United States falls into the category of product R&D. Fritsch and Meschede (2001) show that the share of product R&D in all R&D expenditure in German firms is about 61%.…”