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MARKET COMPETITION, R&D AND FIRM PROFITS IN ASYMMETRIC OLIGOPOLY

Authors


  • *An earlier version of this paper was circulated under the title ‘When Market Competition Benefits Firms.’ We would like to thank Masahiro Ashiya, Naoko Nishimura, Dan Sasaki, Nikolaos Vettas, Wen Zhou, seminar participants at CPRC, EARIE2009, GRIPS, Kwansei Gakuin University, Niigata University, Osaka Prefecture University, Shinshu University, University of Tokyo, two anonymous referees and the Editor, for their helpful comments and suggestions. We gratefully acknowledge financial support from Grant-in-Aid from the Japanese Ministry of Education, Science and Culture. Needless to say, we are responsible for any remaining errors.

Abstract

We investigate a Cournot model with strategic R&D investments wherein efficient low-cost firms compete against less efficient high-cost firms. We find that an increase in the number of high-cost firms can stimulate R&D by the low-cost firms, while it always reduces R&D by the high-cost firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the low-cost firms' profits may indeed increase with the number of high-cost firms. An implication of this result is far-reaching, as it gives low-cost firms an incentive to help, rather than harm, high-cost competitors. We relate this implication to a practice known as open knowledge disclosure, especially Ford's strategy of disclosing its know-how publicly and extensively at the beginning of the 20th century.

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