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This paper investigates an asymmetric duopoly model with R&D competition and product positioning. We find that an inefficient (small) firm may engage in R&D more intensively than an efficient (large) firm in spite of economies of scale in R&D activities. Contrary to the findings of previous studies, competition is more likely to have a positive effect on the investments of the small firm than on those of the large firm. We also find that improving the efficiency of the inefficient firm can reduce both social and consumer surplus.
Keywords: firm heterogeneity; R&D; economies of scale; product positioning
Published Online: 2010-9-9
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