Endogenous timing decisions for product R&D investment competition with demand spillovers in a horizontally differentiated duopoly

By focusing on the constructive and combative spillover effects of the firms’ investment in research and development (R&D), we develop a horizontally differentiated duopoly model in which R&D investment used to improve product quality influences consumer preferences and the choice of consumption goods. Applying the framework of endogenous timing decisions to the model, we examine the mutually beneficial timing of product R&D investment and demonstrate that, if there are asymmetric demand spillovers between the firms, a natural Stackelberg equilibrium persists in noncooperative product R&D investment competition in which the firm producing the product with weaker (stronger) demand spillovers moves first (second) to commit to the investment, regardless of the mode of competition. We consider the outcome of the endogenous timing decisions, based on the view of “endogenous sunk costs (i.e., The Sutton Approach)”. Furthermore, we address process R&D investment competition with technology spillovers under endogenous timing.