RESEARCH-AND-DEVELOPMENT COMPETITION IN A MIXED DUOPOLY UNDER UNCERTAINTY AND EASY IMITATION

A well established result in the R&D literature is that when imitation is easy there will be generally underinvestment due to the free-rider problem. This paper shows that a public firm can be used in tackling the problem of underinvestment. We find that (i) in a mixed duopoly th e public firm invests more in R&D than the private firm, (ii) in the m ixed duopoly the private firm reduces its R&D investment relative to t he private duopoly, while the public firm spends relatively more in R& D, (iii) relative to the social optimum, in the mixed duopoly the publ ic firm overinvests while the private firm underinvests in R&D. A soci al welfare comparison between the private and the mixed ducpoly proves ambiguous. By way of an example, using a quadratic R&D function, we s how that depending on the size of the innovation, social welfare in th e mixed duopoly can be higher than in the private duopoly. (C) 1998 Ac ademic Press.