On Market Integration and Product R&D: A Monopoly Case

ABSTRACT

Applying a monopoly model with endogenous quality choice to the case of multiple national markets, we consider the effect of market integration on product R&D incentives (i.e., quality-improving), profit, and consumer surplus. We demonstrate that the effect of market integration depends on the difference in income distributions between two countries and the level of trade cost. In particular, if the difference in income distributions between two countries is large (small) and/or trade cost is low (high), market integration can decrease (increase) the level of product quality and social welfare in the two countries.

KEYWORDS:

• Integrated market
• price discrimination
• product R&D
• quality choice
• segmented market
• trade cost
• uniform pricing

Notes

¹ See also Szymanski, Valletti, and Demange (2005).

² Note that is a necessary condition, but not a sufficient condition for

³ We define the sum of the total surpluses of the two countries as: In this case, it holds that because

⁴ In this case, it follows that However, if the effect of market integration on the sum of the total surpluses of the two countries is ambiguous.

⁵ In this case, the production cost function is given by: expresses the marginal cost of production, which depends on the level of quality.