A differential game approach to investment in product differentiation

We consider a dynamic oligopoly where firms invest to increase product differentiation and an externality effect operates in the R&D activity via the demand functions. In the fully noncooperative setting, we find that the degree of differentiation resulting from R&D effort is higher, the larger is the population of firms in the industry, If firms cooperate in the R&D activity by setting up an R&D cartel, aggregate investment is larger and product substitutability is lower than in the decentralised case. (C) 2002 Elsevier Science B.V. All rights reserved.