R&D Capability and Market Structure

Abstract

In this theoretical article, we examine the effect of competition on a firm's investment in ‘R&D capability’. We extend the horizons of the discussion on ‘R&D capability’ to market structure by using a simple two-firm patent race model in which the firms can invest in both final technology used in the market and R&D capability for increasing R&D efficiency during a R&D race. Duopolists have a smaller incentive to make capability investment than monopolists and tend to invest in final technology. This myopic behavior may reduce both welfare and the speed of innovation.

Keywords:

• Patent
• Market structure
• Learning
• Innovation process JEL Classification: O31, O34