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Greed and fear in downstream R&D games

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  • Karbowski, Adam

Abstract

The aim of this paper is to investigate the firms' incentives to engage in process R&D under vertical industrial setting, when the raising rivals' cost effect is present. We show that R&D investment of the downstream duopoly firm raises the rival's marginal costs of production. The downstream R&D behavior can give rise to the symmetric investment games, i.e., the prisoner's dilemma, the deadlock game and the harmony game, between downstream competitors. If the costs of the R&D investments made by the downstream firms are large enough, the downstream firms can participate in the harmony game, which results in the investment hold-up or the creation of the R&D-avoiding cartel. For more R&D-efficient downstream firms, the downstream investment game can end up in the prisoner's dilemma or the deadlock game. In the prisoner's dilemma, both downstream firms invest in R&D, but such a behavior is not Pareto optimal. In the prisoner's dilemma, greed and fear make firms invest in R&D. In the deadlock game, both downstream firms invest in R&D, and such a behavior is Pareto optimal. The R&D investments are not induced by any social tension (greed or fear).

Suggested Citation

  • Karbowski, Adam, 2019. "Greed and fear in downstream R&D games," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 32, pages 63-76.
    • Handle: RePEc:zbw:espost:214735
    DOI: 10.7206/DEC.1733-0092.131
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    More about this item

    Keywords

    Research and development; investments; prisoner’s dilemma; deadlock game; harmony game;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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