Oligopoly, product differentiation, and research and development
Abstract
This dissertation explores the strategic research and development of oligopolistic firms in a vertical product differentiation model. Products may differ in terms of quality, and consumers are identical except for income. A different income level leads to a different willingness-to-pay for a given quality so that the income distribution is an important determinant of overall demand. This framework captures the effect of product innovation on substitute goods. We first establish the existence and uniqueness of Nash equilibrium and determine firms' equilibrium payoffs in the price setting game with vertically differentiated products, given each firm's product quality and constant marginal cost. We characterize the Nash equilibrium according to the levels of each firm's product quality and marginal cost. The model does not assume symmetric structure. Research and development expenditure invested to develop new products or to lower production costs of existing products is an important commitment for an oligopolist. We use the above price setting game as the final stage of a multi-stage game and examine R and D decisions by duopolists. The model allows for consideration of both product and process innovation. Product innovation refers to the creation of new products or the improvement of existing products while process innovation refers to the reduction of marginal production costs. We identify the conditions under which the firm producing a low quality product never engages in quality-improving R and D. Trade policy under imperfect competition has recently received substantial attention in the international trade literature. We examine commercial and industrial policies in a multi-stage game based on the above model. In a two-country model with international oligopoly, we address the question of under what conditions a country may improve its welfare by using R and D or export subsidies. We also examine two-country policy games under two alternative regimes: one the subsidy for product-developing R and D and the other the subsidy for cost-reducing R and D. We demonstrate that there is a crucial difference between subsidies for product-developing R and D and subsidies for cost-reducing R and D. With subsidies for product innovation, there is a case where neither of the two countries subsidizes. With subsidies for process innovation, both countries subsidize firms' R and D. Several extensions (a complementary good, R and D spillovers, and R and D with uncertainty) are also discussed.
Degree
Ph.D.
Advisors
Novshek, Purdue University.
Subject Area
Economic theory|Business community
Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server.