November 4, 2012
Entry-Exit Policy under Asymmetric Oligopoly with
Department of Economics
Hawkeye Community College
Waterloo, IA 50703, U.S.A.
This paper analyzes how a duopoly of a multinational ﬁrm and a local ﬁrm, operating
in a vertically diﬀerentiated oligopolistic industry, compete in quality given their strategic
use of R&D costs in the absence of spillovers. By government implicitly using R&D policy
to improve the product quality produced by the domestic ﬁrm, a determination is made
on the eﬀect of reduction in a local ﬁrm’s R&D cost parameter on national welfare. Given
Bertrand competitive model, it is observed in a closed-economy when there’s a reduction
in the marginal average R&D cost of the local ﬁrm, the maximum national social welfare
attained is increased.
JEL Classiﬁcation: F – International Economics; D43 – Oligopoly
Keywords: Duopoly; Quality competition; Welfare eﬀects
Firms are constantly introducing into markets new products which do not directly
provide utility to consumers, but rather provide basic ”characteristics” which consumers
value (Lancaster 1966). New products diﬀer characteristically from one producer to another.
Klein and Leﬄer (1981) describe the desirable characteristics contained in a good as quality,
the basis upon which preferences are made toward a particular commodity bundle. Therefore,
the endogenous choice of quality contained in a commodity enhances competition between or
among ﬁrms. But, investment in quality is increasingly costly. However, ﬁrms often response
to consumers ability and willingness to pay by selling diﬀerent qualities of a commodity. As
a result, the dominant (high quality) ﬁrm always make more proﬁts (Beath et al, 1987).
The endogenous choice of quality by ﬁrms has been studied in most literature. The
standard used in quality-diﬀerentiated models followed the...