Innovation Incentives in an Integrated Market with Vertical Product Differentiation

Abstract

This paper contributes to the debate on the implication of market integration in fostering innovations. In contrast to the literature, we use a model of vertical product differentiation and formalize the speed of response to market integration as a first mover advantage in R&D. If the domestic firm is not too far behind the foreign firm to begin with, and if it responds faster, then the technological gap may get reversed. Further, integration may be welfare improving for both the countries.