R&;D Equilibrium Strategies with Surfers

A typical assumption in the game-theoretic literature on research and development (R&D) is that all firms belonging to the industry under investigation pursue R&D activities. In this paper, we assume that the industry is composed of two groups; the first (the investors) is made of firms that have R&D facilities and are involved in this type of activity. The second group corresponds to firms that are inactive in R&D (the surfers). The latter group benefits from its competitors’ R&D efforts, thanks to involuntary spillovers. This division of the industry is in line with actual practice, where indeed not all firms are engaged in costly and risky R&D. We adopt a two-stage game formalism where, in the first stage investors decide on their levels of investment in R&D, and in the second stage all firms compete à la Cournot in the product market. We characterize and analyze the unique subgame perfect Nash equilibrium. Research supported by NSERC, Canada. F. Ben Abdelaziz is on leave at The College of Engineering, American University of Sharjah, UAE.