12:00- 12:45 Rutger Poldermans (University of Amsterdam)

Field: Econometrics

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12:45-13:30 Anghel Negriu (University of Amsterdam)

Equilibrium type of competition with horizontal product innovation

Abstract: Adding an intermediary stage where firms make R&D investments in product differentiation to the two-stage model considered by Singh and Vives (1984) we obtain a three-stage game where firms first choose their strategic variables (prices or quantities), then invest in R&D to reduce product substitutability and finally compete on the market. Depending on model parameters, all types of market competition can be an equilibrium. As market size increases, the game of choosing the strategic variable changes in structure. For small market size it is a dominance solvable game with Cournot competition as unique outcome – the same result found by Singh and Vives for substitute goods with exogenous product differentiation. For higher market size, the firms face a Prisoner’s Dilemma where Bertrand competition would be Pareto optimal, but Cournot competition is the non-cooperative Nash Equilibrium. As market size increases further, the game of choosing market variables changes structure again leading to asymmetric pure-strategy equilibria where one firm sets quantities and the other sets prices, then setting prices becomes the strictly dominant strategy and Bertrand competition is the unique equilibrium outcome for a relatively small parameter-range. When market size increases even further, the game has multiple equilibria corresponding to different levels of R&D effort and market variable choices, some corresponding to differentiated duopoly and some located at the upper boundary for R&D effort where the two firms become two separate monopolies. Finally, for sufficiently high market size all equilibria corresponding to differentiated duopoly disappear leaving monopoly the only equilibrium outcome.

Field: Nonlinear dynamics, Organization economics