Competitiveness and R&D competition revisited

This paper formulates a duopoly model of firms concerned with relative profits as well as their own profits and investigates the relationship between the degree of competitiveness in a market and R&D expenditure. We find a non-monotone relationship between the two variables. When the duopoly market is not particularly competitive and when it is highly competitive, R&D activities are intensified. Thus, we are able to obtain similar results to both the pro-competitive and the Schumpeterian views in a single framework. We also discuss the welfare implications of changing competitiveness and consider cases of oligopoly and R&D cooperation as extensions to our basic model.

► Firms care about the weighted sum of their own profits and rivals' profits. ► We interpret the weight on the rivals' profits as the degree of competitiveness. ► We discuss the relation between the degree of competitiveness and R&D expenditure. ► When the market is less or much competitive, R&D activities are intensified. ► Our result explains the pro-competitive view and the Schumpeterian view consistently.