Strategic Interactions, Social Optimality and Growth

We focus on the implications of strategic interactions among research intensive firms on the rates of growth when the number of competing firms is small and firms recognise the effects their investment decisions have on the production behaviour of their rivals. Similar to other results, we find that the mode of oligopolist competition can have a great effect on the rate of growth, but we present novel channels of these effects. More importantly and unlike standard results, we show that for the Cournot type of competition, a (constrained) socially optimal rate of growth can be attained. On the other hand, this can never be achieved under the more severe Bertrand competition. These findings are thus parallel to the conclusions in strategic trade literature. Our results demonstrate that conclusions from the "strategic trade" literature are robust enough, if ex- tended into an explicitly dynamic general equilibrium framework. More importantly, though, they make evident that the questions of optimal policy design related to organisational structure and strategic conduct are tractable in the framework of endogenous growth models in sufficient detail.