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R&D investments and location choices with three firms

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  • Guo, Wen-Chung
  • Lai, Fu-Chuan

Abstract

This study examines a three-stage game involving three firms that make sequential decisions regarding their locations, participate in quality-enhancing research and development (R&D) with spillover effects, and establish pricing strategies. In contrast to the potential for maximal differentiation observed in duopolies, adding a third firm consistently results in only moderate locational differentiation because of a diminished need to circumvent competition. Interestingly, the firm positioned in the middle incurs the highest R&D costs despite potential free-riding by competitors, driven by the strategic need to offset its competitive disadvantage. The presence of R&D spillover encourages firms to choose closer proximity, enhancing consumer surplus and social welfare by reducing prices and transportation costs, even as R&D investment and product quality may decline. The dynamics and implications of expanding the model to include a fourth firm are also explored, further enriching the understanding of competitive strategies in multi-firm markets.

Suggested Citation

  • Guo, Wen-Chung & Lai, Fu-Chuan, 2024. "R&D investments and location choices with three firms," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 1448-1459.
    • Handle: RePEc:eee:reveco:v:92:y:2024:i:c:p:1448-1459
    DOI: 10.1016/j.iref.2024.02.054
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    More about this item

    Keywords

    Quality-improving R&D; Spillover; Locations; Three firms; Vertical differentiation;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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