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Firm Performance and Research and Development
Abstract
The objective of this chapter is to analyze the impact of research and development activities on the profitability of oligopolistic firms. The analysis is conducted in a two-stage, game-theoretic model of duopolistic competition. In the first stage, firms decide about the size of R&D investments, and in the second stage, they decide about the supply of the final product. On the one hand, different levels of research externalities are considered. And, on the other hand, three types of firms' behavior in the final-product market are analyzed: Cournot competition, Stackelberg competition, and cooperation within a cartel. The numerical analysis shows that the full cartelization of the industry generates the highest profits for both firms, independent of the size of technological spillovers. In the non-cartelized industry the performance of the Stackelberg leader is better in comparison to the Cournot firm, when the extent of research externalities is not too high.
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