Abstract
Product quality choices and innovations have always been important issues for firms. This essay constructs a simple price-competition duopoly model to study the effects of market size and R&D costs on multi-product firms’ process R&D decisions, as well as, the corresponding equilibrium quantities and profits. We find that under monopoly, the R&D investment on the high-quality product is more likely to be larger than the low quality product, the larger the market size, the lower the R&D cost, or the lower the quality parameter. We also consider a duopolistic competition between a firm producing two products (multi-product firm) and a single-product firm. In addition to cannibalization effect between two products produced by the multiproduct firm, there is also the competition effect from the single-product firm. This changes the firms’ R&D decisions and corresponding output levels and profits. We find that under certain parameter values, the results obtained in the case of monopoly reverse.