R&D Activities in a Differentiated Goods Duopoly with Quadratic Cost Function

Abstract

The purpose of this paper is to assess the relationship between the firms’ behavior in the differentiated product market and the decisions regarding the R&D investments. The comparison is made between the case of the Stackelberg-type duopolistic competition in the final product market and the situation of a cartelized industry under the assumption of quadratic cost functions. On the one hand, different levels of product differentiation are considered. And, on the other hand, the impact of the extent of research spillovers is analyzed. The numerical analysis leads to the conclusion that, under the assumption of quadratic cost functions, it is always beneficial for both firms to form an industry cartel. This result is similar to the case of the linear cost functions with one exception: the threat of cartelizing the industry was not present when the final products were homogenous.