COMPETITION, INNOVATION AND WELFARE

We show the effects of Bertrand and Cournot competition on R&D investmentand social welfare in a duopoly with R&D competition where success in R&D isprobabilistic. We show that R&D investments are higher under Bertrand (Cournot)competition when R&D productivities are sufficiently low (high), and this holds for bothdrastic and non-drastic R&D. We also show that Cournot competition can generate highersocial welfare in absence of knowledge spillover and this happens if R&D is drastic,difference between the pre-innovation and the post-innovation costs is sufficiently large andthe R&D productivities are moderate. So, our results differ significantly from both thedeterministic R&D model and the patent race model.