ASYMMETRIC SPILLOVERS AND INVESTMENTS IN RESEARCH AND DEVELOPMENT OF LEADERS AND FOLLOWERS

The focus of this paper is on the incentives of firms to invest in research and development (R&D) when sequential moves are taken into account. Leading firms move before followers in investment and in output choices in a four stage game setting. Leaders may compete or cooperate in R&D with other leaders, given that followers compete. Followers may compete or cooperate in R&D with other followers given that leaders compete. There may be spillovers between leaders and between followers and also between these two groups of players. Due to the complexity of the model, results are obtained by numerical simulations. The impact of symmetric spillovers is similar but not identical to the tendencies in two stage models with simultaneous R&D moves. A relatively wide set of circumstances is identified where followers tend to invest more than leaders. Critical spillover values are identified that drive the effects of cooperation in R&D as is the case in simpler settings. Situations are detailed, where consumer surplus and static welfare are best served by cooperation of followers rather than cooperation of leaders.