Journal of Institutional and Theoretical Economics

December 2013, 169(4):660-679

Dynamic Games of R&D Competition in a Differentiated Duopoly

Li, Changying and Jianhu Zhang

Based on a Hotelling-type model, this paper analyzes a differential game where two firms engage in quality-enhancing research and development (R&D). The analysis is formulated in terms of open-loop and feedback solutions. We find that the open-loop stationary levels of R&D and quality are socially efficient. Moreover, compared to open-loop strategies, feedback strategies lead to higher stationary levels of prices and profits, but lower levels of R&D, quality, consumer surplus, and social welfare. In addition, compared to the social optimum, both open-loop and feedback strategies yield a closer stationary distance between the two firms.