We present a dynamic duopoly model of technical innovation in which R&D costs decrease exogenously with time, and inter-firm knowledge spillover lowers the second comer's R&D cost. The spillover effect only becomes available after a disclosure lag. These features allow us to identify a new type of equilibrium: the leader delays investment until the R&D cost is low enough that the follower finds it optimal to invest as soon as he can benefit from the spillover. This equilibrium is subgame perfect over a wide range of parameters and raises several interesting implications. First, in our new equilibrium, the time delay between the two R&D investments is realistically short. Second, while the presence of a spillover favors the second-mover, this benefit is not enough to rule out a first-mover advantage. Indeed, the first-mover advantage survives whenever technical progress is sufficiently fast and the disclosure lag is relatively long. Third, in case of a major innovation, our equilibrium implies under--investment, which requires a substantial public intervention in favor of the investment activity.

Femminis, G., Martini, G., First-Mover Advantage in a Dynamic Duopoly with Spillover, <<THE B.E. JOURNAL OF THEORETICAL ECONOMICS>>, 2010; 10 (No. 1): 1-44 [http://hdl.handle.net/10807/12288]

First-Mover Advantage in a Dynamic Duopoly with Spillover

Femminis, Gianluca;Martini, Gianmaria
2010

Abstract

We present a dynamic duopoly model of technical innovation in which R&D costs decrease exogenously with time, and inter-firm knowledge spillover lowers the second comer's R&D cost. The spillover effect only becomes available after a disclosure lag. These features allow us to identify a new type of equilibrium: the leader delays investment until the R&D cost is low enough that the follower finds it optimal to invest as soon as he can benefit from the spillover. This equilibrium is subgame perfect over a wide range of parameters and raises several interesting implications. First, in our new equilibrium, the time delay between the two R&D investments is realistically short. Second, while the presence of a spillover favors the second-mover, this benefit is not enough to rule out a first-mover advantage. Indeed, the first-mover advantage survives whenever technical progress is sufficiently fast and the disclosure lag is relatively long. Third, in case of a major innovation, our equilibrium implies under--investment, which requires a substantial public intervention in favor of the investment activity.
Inglese
Femminis, G., Martini, G., First-Mover Advantage in a Dynamic Duopoly with Spillover, <<THE B.E. JOURNAL OF THEORETICAL ECONOMICS>>, 2010; 10 (No. 1): 1-44 [http://hdl.handle.net/10807/12288]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10807/12288
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