Efficiency of Cournot and Bertrand Equilibria with Non-cooperative and Cooperative R&D in Presence of Product Differentiation

Strategic cooperative and non-cooperative R&D decisions are analysed in the presence of R&D spillover and product differentiation. Using a two-stage game it is shown that in both Cournot and Bertrand duopolies, R&D and output levels are larger and prices are lower under cooperative R&D agreements compared to non-cooperative R&D. For complementary and independent goods, these results are valid for any degree of R&D spillover and may hold for substitute goods even for sufficiently small R&D spillover. In terms of social welfare, cooperative R&D agreements dominate non-cooperation for both Cournot and Bertrand duopolies. As for relative efficiency of Cournot and Bertrand equilibria, it is shown that the traditional efficiency ranking may be reversed and Cournot equilibrium may dominate Bertrand equilibrium if the degree of product differentiation is low and the products are reasonably close substitutes for high degree of R&D spillover provided that R&D productivity is high. This result is stronger for cooperative R&D decision. JEL Codes: D21, D43, L13

Signalling Service Quality through Price and Certifications

Signalling quality in the service domain and finding optimal strategies for the same have not been explored well in marketing literature. The study proposes a price–certification combination strategy to signal the service quality when the quality level remains unobserved by the consumers. Theoretical modelling has been done in a duopoly setting to determine the possible separating and pooling equilibriums when there is a possible long-term effect of low-quality belief. The separating equilibrium shows that the low-quality firm will not opt for certification and its price will depend on its quality distance from and the price of the high-quality firm. The high-quality firm’s certification costs will also depend on the quality distance of the two firms, its price level and the possible future effects of not participating in the certification programme. The range of possible certification costs of the high-quality firm increases as the future loss of not being certified increases. Moreover, as the quality difference between the firms increases, the high-quality firm can reduce its certification costs and after some level can actually signal only by its high price without any certification. The polling equilibrium of the analysis shows a Bertrand equilibrium, where both the firms set their price and certification costs to zero. The implications and future research directions are suggested in the article.

Existence Advertising, Price Competition and Asymmetric Market Structure

We examine a two-stage duopoly game in which firms advertise their existence to consumers in stage 1 and compete in prices in stage 2. Whenever the advertising technology generates positive overlap in customer bases, the equilibrium for the stage-1 game is asymmetric in that one firm chooses to remain small in comparison to its competitor. For a specific random advertising technology, we show that one firm will always be half as large as the other. No pure-strategy price equilibrium exists in the stage-2 game, and as long as there is some overlap in customer bases, the mixed-strategy price equilibrium does not converge to the Bertrand equilibrium.

Bertrand Competition in Markets with Fixed Costs

This paper provides necessary and sufficient conditions for the existence of a pure strategy Bertrand equilibrium in a model of price competition with fixed costs. It unveils an interesting and unexplored relationship between Bertrand competition and natural monopoly. That relationship points out that the non-subadditivity of the cost function at the output level corresponding to the oligopoly break-even price, denoted by D(pL(n)), is sufficient to guarantee that the market sustains a (not necessarily symmetric) Bertrand equilibrium in pure strategies with two or more firms supplying at least D(pL(n)). Conversely, the existence of a pure strategy equilibrium ensures that the cost function is not subadditive at every output greater than or equal to D(pL(n)).