Duopoly innovation under product externalities

Abstract

This study argues that product substitutability and complementary have major effects on the relationship between innovation and competition and some interesting conclusions are derived. First, innovative investment is reduced with market power. The total quantity of products and social welfare are increased with market power while decreased with increasing of substitutability or deceasing of complementary. Second, the equilibrium products and innovative investment are lower than those under social optimality. Finally, by comparison with Cournot quantity competition, Bertrand price competition is keener. But the main conclusions are the same under both kinds of competitions.