Noncooperative and Cooperative International Product R&D with Spillovers

This paper analyzes and compares the equilibrium levels of R&D expenditures, product quality, output, price, consumer surplus, and profit of a firm from noncooperative and cooperative product R&D games. This is done using an international duopoly model in which two firms produce differentiated products and compete in a third country’s market. It is shown that in a symmetric equilibrium: (i) R&D expenditure (hence, also the quality) and output are higher in a cooperative R&D game than a noncooperative game if R&D spillovers are strong, or the goods are sufficiently differentiated, except with no spillovers, and the results are reversed if R&D spillovers are weak, or the goods are not too differentiated and R&D spillovers are quite small; (ii) prices are the same in noncooperative and cooperative R&D games; (iii) consumer surplus in the third country is lower in a cooperative R&D game than a noncooperative game; and (iv) profit of each firm, and hence aggregate profit, is lower in a cooperative R&D game than a noncooperative game if R&D spillovers are strong, or the goods are sufficiently differentiated, except with no spillovers, and the results are reversed if R&D spillovers are weak, or the goods are not too differentiated and R&D spillovers are quite small.