Product R&D and International Trade under Bertrand Competition

This study analyzes the equilibrium level of product differentiation, aggregate profit, and aggregate welfare from competition and two types of cooperation in product R&D investments in an international duopoly model under price competition. We show that the equilibrium level of product differentiation can be the highest in the harmonization of product R&D investment; the second highest in the asymmetry of product R&D investment; and the lowest in product R&D competition. We also show that aggregate profit and aggregate welfare under trade liberalization can be the highest in the harmonization of product R&D investment if the difference between the cost of product R&D is sufficiently small, while those under trade liberalization can be greatest in product R&D competition if the difference in cost is sufficiently large enough to reverse the sign.