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

Abstract

We consider the efficiency of Cournot and Bertrand equilibria in a duopoly with substitutable goods where firms invest in process R&D that generates input spillovers. Under Cournot competition firms always invest more in R&D than under Bertrand competition. More importantly, Cournot competition yields lower prices than Bertrand competition when the R&D production process is efficient, when spillovers are substantial, and when goods are not too differentiated. The range of cases for which total surplus under Cournot competition exceeds that under Bertrand competition is even larger as competition over quantities always yields the largest producers' surplus.

Reflections on the Relation Between Competition and Innovation

“…a strategic effect, a spillover effect, a size effect and a cost effect (Qiu, 1997;Hinloopen and Vandekerckhove, 2009). The signs of the cost, size and spillover effect are the same for both Cournot and Bertrand competition.…”

Foreign competition, domestic competition and innovation in Chinese private high-tech new ventures

“…For the competition and innovation literature, our study reconciles previous positive (Nickell, 1996;Buckley et al, 2002;Liu & Buck, 2007) and negative (Schumpeter, 1950;Hinloopen & Vandekerckhove, 2009;Chang & Xu, 2008) assertions in the literature on the relationship between foreign competition and innovation, by providing theoretical arguments and empirical evidence for a curvilinear U-shaped relationship. In contrast to the well-established linear or inverted U-shaped relationships between competition and innovation found in existing studies of advanced economies (Aghion et al, 2005;De Bondt & Vandekerckhove, 2012;Polder & Veldhuizen, 2012), our study's unique focus on transition economies, and evidence of a curvilinear U-shaped relationship, implicitly highlight the importance of external resource environments and learning in shaping the relationship between competition and innovation.…”

“…Existing research in economics literature is mainly built on two traditional views: the 'Schumpeterian effect of competition' which emphasizes that increased competition discourages innovation, and the 'escape competition effect' with a stress on the innovation-enhancing effect of competition. Empirical findings are mixed, with some studies reporting a positive impact of competition on innovation (Carlin et al, 2004;Nickell, 1996), while others finding a negative association (Blundell et al 1999;Hinloopen & Vandekerckhove, 2009;Tang, 2006). These studies examine competition based on industry characteristics without taking account of the institutional setting of a country, which may underpin new mechanisms for the well-observed relationship between competition and innovation.…”

The Effects of Process R&D in an Asymmetric Duopoly Under Cournot and Supply Function Competitions

“…A somewhat surprising answer to this question was obtained by Qiu (1997), showing that in a differentiated duopoly with process R&D, the Cournot competition in the output market always induces a higher R&D effort than the Bertrand competition, while the outcome of the Cournot competition can become more efficient than the outcome of the Bertrand competition if the duopolistic products are close substitutes and R&D productivity as well as spillovers in the output of R&D are sufficiently high. In fact, the same results were later shown to also hold when the R&D competition model of Qiu (1997) is modified to involve product R&D (as in Symeonidis, 2013) instead of process R&D or modified to involve input spillovers in R&D (as in Hinloopen and Vandekerckhove, 2009) instead of output spillovers.…”