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R&D investments with spillovers and endogenous horizontal differentiation

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  • Colombo, Stefano
  • Lambertini, Luca

Abstract

We investigate the implications of cost-reducing R&D activities with spillovers in a Hotelling model with endogenous product differentiation driven by quadratic transportation costs. We consider two different three-stage games: in the first, firms choose locations, then R&D efforts and finally prices; in the second, R&D strategies are decided at the first stage and locations are chosen at the second, with price competition taking place at the third. We identify the conditions whereby process innovation brings about a reduction of product differentiation in equilibrium, consequently implying lower profits. Equilibrium product differentiation and profits are increasing in R&D spillovers. Then, transforming the structure into a twofold version of a four-stage game, we allow firms to commit not to invest in R&D, to show the presence of an underlying prisoners’ dilemma affecting R&D decisions. Finally, we illustrate R&D cartels’ ability to eliminate wasteful sunk costs, and outline policy prescriptions.

Suggested Citation

  • Colombo, Stefano & Lambertini, Luca, 2023. "R&D investments with spillovers and endogenous horizontal differentiation," Regional Science and Urban Economics, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:regeco:v:98:y:2023:i:c:s0166046222000990
    DOI: 10.1016/j.regsciurbeco.2022.103861
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    More about this item

    Keywords

    Horizontal differentiation; Process innovation; Endogenous locations;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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