Strategic Commitment with R&D: The Symmetric Case

When research and development take place before the associated output is produced, imperfectly competitive firms may use R&D for strategic purposes rather than simply to minimize costs. Using a simple symmetric two-stage Nash duopoly model, we show that such strategic use of R&D will increase the total amount of R&D undertaken, increase total output, and lower industry profit. However, the strategic use of R&D introduces inefficiency in that total costs are not minimized for the output chosen. Nevertheless, net welfare may rise, and certainly rises if products are homogeneous, marginal cost is non-decreasing, and demand is convex or linear.