Cost Reduction, Competitive Pressure and Firms' Optimal R&D Strategies in a Duopolistic Industry

This paper deals with a duopolistic industry where firms are engaged in cost-reducing R&D activity in order to maximize their market shares. Firms' R&D competition is characterized as a dynamic noncooperative feedback game where the optimal strategies are affected by the extra-industry R&D activity and the degree of intra-industry spillovers. Numerical simulations highlight the importance of the assumptions on the firms' absorptive capacity (to exploit external knowledge) in determining the optimal levels of firms R&D investrnents.