Endogenous R&D spillovers and locational choice

We present a three-stage game where two firms choose location, RWD and price, under the assumption that RWD spillovers depend on firms' location. That is, the closer firms are to each other, the greater the benefit they receive from, their rivals' efforts in quality-enhancing RWD. We show that the distance between firms' location increases with the degree of product differentiation. Further, we find that minimal quality differentiation always occurs. Finally, investment in RWD is positively associated with the degree of product differentiation. (c) 2004 Elsevier B.V. All rights reserved.