R&D Competition with Asymmetric Firms.

This paper considers a nontournament duopoly model of process innovation. Costs of production can be reduced by firms spending on R&D. Firms are asymmetric in the sense that they may differ in their initial costs of production . It is shown that the high-cost firm may spend more (or less) in R&D than its low-cost rival. This main result is dependent on the relative magnitude of two important forces: the incentive effect, whereby the low-cost firm always has a stronger incentive to spend on cost-reducing R&D, and the effectiveness factor, which favors the high-cost firm. Copyright 1996 by Scottish Economic Society.