R&D Incentives under Bertrand Competition: A Differential Game

Authors:	Lambertini Luca, University of Bologna, Italy Cellini Roberto, University of Catania, Italy
Topic:	9.1 Economic & Business Systems
Session:	Economic Systems
Keywords:	economic design, economic systems, optimal control, research and development

Abstract

We investigate dynamic R&D for process innovation in an oligopoly where firms invest in cost-reducing activities. We focus on the relationship between R&D intensity and market structure, proving that the industry R&D investment monotonically increases in the number of firms. This result contradicts the established wisdom acquired from static games on the same topic. We also prove that, if competition is sufficiently tough, any increase in product substitutability reduces R&D efforts.