Abstract
We consider a model of di¤erentiated products produced by …rms which are asym- metric in either product quality or production cost. In a two-stage game setting, the…rms decide the levels of investment for product R&D, which make the …rms’prod- ucts less similar to each other, in the …rst stage and engage in Cournot or Bertrandcompetition in the second stage. In a similar setting as ours, Lin and Saggi (2002) found that under symmetric-…rm case, a …rm always has incentive for conductingproduct R&D, and Bertrand …rms invest more in product R&D than Cournot …rms. However, by allowing the asymmetry between …rms, we obtain results di¤erent thantheirs: (i) a …rm does not have an incentive to conduct product R&D if the degree of asymmetry between two …rms is su¢ ciently large; (ii) a …rm with a lower quality-cost margin always invests more in product R&D than its higher-quality-cost-margin competitor regardless of the competition mode; (iii) Cournot …rms invest more thanBertrand ones if the marginal cost for product R&D rise su¢ ciently rapidly in the level of investment, the degree of asymmetry between …rms is su¢ ciently large, andthe products are su¢ ciently similar to each other initially