Duopoly R&D competition with flexible spillovers

A duopoly model of R&D competition is presented to investigate whether an equilibrium R&D level with flexible spillovers is insufficient (or excessive) from the viewpoint of social welfare. The model focus on flexible spillovers which include much portion of externality occurring in R&D activity. Flexible spillovers refer to the spillovers that vary with industry equilibrium level of R&D. Innovating firms have incentives to cooperate in R&D in the presence of large spillovers. For any symmetric R&D profile, socially desirable equilibrium output is larger than equilibrium output produced in duopoly. Cooperative equilibrium R&D investment is observed to be socially insufficient in terms of welfare criterion irrespective of the magnitude of spillovers. While noncooperative R&D yields socially excessive expenditure on research project for a certain range of spillovers.