John Beath

Strategic R&D Policy

The outcome of technological competition between firms (or countries) depends on the resolution of two forces: the profit incentive and the competitive threat. This is illustrated using a simple duopoly model. This model is then used to analyze two policy issues: subsidizing R & D and collaborative research ventures. In evaluating the second of these, some use is made of numerical simulations.

Sequential Product Innovation and Industry Evolution

A certain sequence of innovations in a vertically differentiated good is considered. Two firms are engaged in a series of bidding games to acquire the (infinitely- lived) patents to these. Managerial diseconomies restrict firms to producing a single good which is chosen optimally from the set of patents owned by the firm. Product market equilibrium is Bertrand. Two theorems provide (1) a sufficient condition for the current leader to be overthrown (action-reaction) and (2) a necessary and sufficient condition for persistent dominance. An illustrative example shows that sequences satisfying these conditions can always be constructed. Copyright 1987 by Royal Economic Society.

Strategic R&D and Innovation

Innovation is important to an economy for a variety of reasons. First, it is through innovation and the resulting investment in new and better processes that technical progress comes about and such change is essential for economic growth. In the second place, the new products that result from innovation are crucial in improving living standards. Thirdly, in an international context, there is considerable evidence that a country’s trade performance depends significantly on its non-price competitiveness and innovation contributes directly to this (Fagerberg, 1988). Because of the central importance of innovation, it is therefore not surprising that the resurgence of interest in industrial organisation has resulted in a considerable improvement in our analytical understanding of the process and of the relationship between the market equilibrium and the social optimum. The technique that has proved to be most useful is game theory and our aim in this chapter is to give a straightforward and coherent account of what has been learned from its application to the analysis of strategic technological competiton.

The Economic Theory of Product Differentiation.

There are few industries in modern market economies that do not manufacture differentiated products. This book provides a systematic explanation and analysis of the widespread prevalence of this important category of products. The authors concentrate on models in which product selection is endogenous. In the first four chapters they consider models that try to predict the level of product differentiation that would emerge in situations of market equilibrium. These market equilibria with differentiated products are characterised and then compared with social welfare optima. Particular attention is paid to the distinction between horizontal and vertical differentiation as well as to the related issues of product quality and durability. This book brings together the most important theoretical contributions to these topics in a succinct and coherent manner. One of its major strengths is the way in which it carefully sets out the basic intuition behind the formal results. It will be useful to advanced undergraduate and graduate students taking courses in industrial economics and microeconomic theory.

The economic theory of product differentiation: Product differentiation and market imperfection: limit theorems

Introduction Up to this point we have taken for granted the persistence of imperfectly competitive market equilibria. The question that we now need to pay some attention to is just how fundamental such market equilibria are. Another way of posing the question is to ask whether, in the absence of contrived barriers to entry, one might expect, in an appropriate limiting sense, such equilibria to converge to the perfectly competitive equilibrium. If the latter were to be the case we could not then consider equilibria such as Chamberlins large-group equilibrium as fundamental. This area of limiting results is one which has been actively researched by theorists in recent years and it is the work that we want to consider now. There have been two broad approaches to the analysis of this topic. One of these, the ‘credible threats’ approach, has tackled the question by trying to make barriers to entry endogenous. They then become choice variables for incumbents in a multi-stage entry game and one then looks for a perfect equilibrium in this game in which potential entrants rationally choose not to enter. This is a question to which we turn in the next chapter and it is one that pre-supposes that entry is not ultra-free. However if it is difficult to deter entry then one would expect to find market equilibria in which the number of firms in the industry reached the maximum that was consistent with economic feasibility given the relationship between technology and market size.

The economic theory of product differentiation: Product differentiation and the entry process

Introduction In this chapter we focus once again on the Hotelling-type of spatial model and use it to consider some predictions about the effects of product differentiation. We shall deal with two aspects thought to be characteristic of differentiated product markets. The first of these is the question of whether or not there exist pure profits in a free-entry equilibrium. The second is the question of whether or not it is optimal to use the introduction of new products (brand proliferation) as an entry-deterring device. These are issues that have been examined by a number of authors: Archibald and Rosenbluth (1975), Bonnano (1987), Eaton and Lipsey (1976, 1978, 1980), Hay (1976), Judd (1985), Lane (1980) and Schmalensee (1978). The existence of pure profit in free-entry equilibrium To motivate the discussion in this section let us start by considering a market, entry into which involves the non-recoverable (sunk) cost of F . Suppose also that in the oligopoly equilibrium each firm in the market earns a profit of π( n ), where n is the number of firms in the market. (Since a firm is free to close down, π( n )>0, for all n .) Now assume that π( n ) decreases with n (as would be the case in standard Cournot-type oligopoly models).