The purpose of this paper is to extend a theoretical framework for analyzing competition and innovation in the presence of horizontal spillovers.
A theoretical analysis approach is adopted to drive the paper’s findings.
It is shown that when firms behave non-cooperatively in both the R&D and production stages, the degree of spillover has a negative relationship with the effective and respective R&D expenditures of each firm as well as the level of social welfare. An inverted-U relationship between competition and social welfare also holds. When firms behave cooperatively in the R&D stage, and non-cooperatively in the production stage the relationship between the R&D expenditure of the joint research lab and the number of firms in the market is negative.
In the literature on R&D spillovers and process innovation, efforts are mostly focused on the comparative R&D expenditures and the relative social welfare between non-cooperative and cooperative R&D. The question of the effectiveness of R&D technology on the optimal number of firm, however, is not explicitly addressed. The paper is intended to address this lacuna.
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