COST REDUCTION, COMPETITIVE PRESSURE AND FIRMS OPTIMAL RESEARCH-AND-DEVELOPMENT STRATEGIES IN A DUOPOLISTIC INDUSTRY

This paper deals with a duopolistic industry where firms are engaged i n cost-reducing R&D activity in order to maximize their market shares. Firms' R&D competition is characterized as a dynamic noncooperative f eedback game where the optimal strategies are affected by the extra-in dustry R&D activity and the degree of intra-industry spillovers. Numer ical simulations highlight the importance of the assumptions on the fi rms' absorptive capacity (to exploit external knowledge) in determinin g the optimal levels of firms R&D investments.