Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia
ABSTRACT
We investigate the endogenous choice between price- and quantity-setting behaviour in a duopoly game where firms invest in product development first, and then play a marketing game later. Only in the initial R&D stage, the two firms set up a joint venture in order to share the costs of product innovation. We discover that, in the presence of joint initial investment inproduct innovation, the well-established result that firms endogenously choose quantity competition (a' la Singh and Vives, 1984) may not be the only equilibrium outcome. In particular, the procedural order between firms' cost sharing decisions and their marketing decisions makes a key difference in the resulting equilibrium profiles.
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