THE DEGREE OF SPILLOVERS AND THE NUMBER OF RIVALS FOR MAXIMUM EFFECTIVE RESEARCH-AND-DEVELOPMENT

The amount of cost reduction or effective R & D that results in a symmetric sequential Nash equilibrium with quadratic payoffs and differentiated goods, is shown to increase with spillovers in oligopolies with a 'few' rivals and to achieve a maximum for spillovers that are not perfect in industries with 'many' firms. Similar tendencies apply for consumer surplus, profits and static welfare. More rivals typically lead to reduced investments, output and profitability, while consumer surplus and welfare increase, or at least do not decrease. Limited entry in markets with a 'few' rivals may enhance innovative investments, profitability and consumer surplus, if only product differentiation and spillovers are sufficiently high and R & D costs sufficiently low. Too many rivals will then again lead to reductions and a decrease in static welfare.