GREED AND FEAR IN DOWNSTREAM RD GAMES

The aim of this paper is to investigate the firms’ incentives to engage in process RD under vertical industrial setting, when the raising rivals’ cost effect is present. We show that RD investment of the downstream duopoly firm raises the rival’s marginal costs of production. The downstream RD behavior can give rise to the symmetric investment games, i.e., the prisoner’s dilemma, the deadlock game and the harmony game, between downstream competitors. If the costs of the RD investments made by the downstream firms are large enough, the downstream firms can participate in the harmony game, which results in the investment hold-up or the creation of the RD-avoiding cartel. For more RD-efficient downstream firms, the downstream investment game can end up in the prisoner’s dilemma or the deadlock game. In the prisoner’s dilemma, both downstream firms invest in RD, but such a behavior is not Pareto optimal. In the prisoner’s dilemma, greed and fear make firms invest in RD. In the deadlock game, both downstream firms invest in RD, and such a behavior is Pareto optimal. The RD investments are not induced by any social tension (greed or fear).