Welfare Analysis of Cournot and Bertrand Competition With(out) Investment in R & D

Tondji, Jean-Baptiste (2016): Welfare Analysis of Cournot and Bertrand Competition With(out) Investment in R & D.

Abstract

I consider the model of a differentiated duopoly with process R&D when goods are either substitute, complements or independent. I propose a non-cooperative two-stage game with two firms producing differentiated goods. In the first stage, firms decide their technologies and in the second stage, they compete in quantities or prices. I evaluate the social welfare within a framework of Cournot and Bertrand competition models with or without investment in research and development. I prove that the Cournot price can be lower than Bertrand price when the R&D technology is relatively inefficient; thus, Cournot market structure can generate larger consumer's surplus and welfare.

• Item Type: MPRA Paper
• Language: English
• Keywords: R&D, Cournot duopoly, Bertrand model, Welfare.
• Subjects: D - Microeconomics > D6 - Welfare Economics > D60 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D

References

[1] Arghya, G. and Manipushpak, M., 2008,`Comparing Bertrand and Cournot Outcomes in The Presence of Public Firms', Working paper, 16.

[2] Cheng, L., 1985, `Comparing Bertrand and Cournot Equilibria: a Geometric Approach', Rand Journal of Economics, 16, pp. 146-152.

[3] Delbono, F. and Denicolo, V., 1990, `R & D Investment In a Symmetric And Homogeneous Oligopoly, Bertrand vs Cournot', International Journal of Industrial Organization, 8, pp. 297-313.

[4] Hackner, J., 2000, `A Note on Price and Quantity Competition in Differentiated Oligopolies', Journal of Economic Theory, 93, pp. 233-239.

[5] Hsu, J., and Wang, X. H., 2005, `On Welfare under Cournot and Bertrand Competition in Differentiated Oligopolies', Review of Industrial Organization, 27, pp. 185-191.

[6] Kabiraj, T., and Roy, S., 2002, `Cournot and Bertrand Prices In A Model Of Differentiated Duopoly With R and D', Working paper.

[7] Motta, M., 1993, `Endogenous Quality Choice Price vs Quantity Competition', The Journal of Industrial Economics, 41, 2, pp. 113-131.

[8] Okuguchi, K.,1987, `Equilibrium Prices in the Bertrand and Cournot Oligopolies', Journal of Economic Theory, 42, pp. 128-139.

[9] Qiu, L. D., 1997, `On the Dynamic Efficiency of Bertrand and Cournot Equilibria', Journal of Economic Theory, 75, pp. 213-229.

[10] Singh, N., and X. Vives, 1994, `Price and Quantity Competition in a Differentiated Duopoly', Rand Journal of Economics, 15, pp. 546-554.

[11] Sutton, J., 1997, `One Smart Agent', RAND Journal of Economics 28, pp. 605-628.

[12] Sutton, J., 1998, `Technology and Market Structure', M.I.T Press, MA.

[13] Symeonidis, G., 2003, `Comparing Cournot and Bertrand Equilibria in a Differentiated Duopoly with Product R&D', International Journal of Industrial Organization, 21, pp. 39-45.

[14] Vives, X., 1985, `On the Efficiency of Bertrand and Cournot Equilibria with Product Differentiation', Journal of Economic Theory, 36, pp. 166-175.