R&D Investments Under Endogenous Cluster Formation

38 Pages Posted: 15 Mar 2016

See all articles by Herbert Dawid

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics; Center for Mathematical Economics

Tim Hellmann

Independent

Date Written: March 15, 2016

Abstract

We study investments in R&D and the formation of R&D clusters of firms which are competitors in the market. In a three stage game, firms first decide on the budget allocated to their R&D department, then form research clusters and finally compete in quantities. The second stage cluster formation is modeled by the unanimity game introduced in Bloch (1995). We show that for any distribution of R&D investments, an equilibrium of the second stage cluster formation exists and is generically unique up to a permutation of firms which chose the same investment. Restricting to two investment levels in the first stage, we provide a complete characterization of the equilibria of the three stage game. We show that for some range of investment costs, equilibria with no-investment co-exist with equilibria where a large fraction or even all firms invest in R&D. Furthermore, in the high-investment equilibrium firms over-invest compared to a scenario where research clusters are ex-ante fixed and also compared to the welfare optimum.

Keywords: R&D, cluster formation, oligopoly

JEL Classification: C71, C72, L13, O30

Suggested Citation

Dawid, Herbert and Hellmann, Tim, R&D Investments Under Endogenous Cluster Formation (March 15, 2016). Bielefeld Working Papers in Economics and Management No. 04-2016, Available at SSRN: https://ssrn.com/abstract=2747877 or http://dx.doi.org/10.2139/ssrn.2747877

Herbert Dawid (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany
+49-521-1064843 (Phone)
+49-521-1062994 (Fax)

Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

Tim Hellmann

Independent ( email )

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