Endogenous Timing of R&D Decisions and Privatization Policy with Research Spillovers

This study investigates an endogenous R&D timing game between duopoly firms which undertake cost-reducing R&D investments simultaneously or sequentially, and then play Cournot output competition. We examine and compare equilibrium outcomes in private and mixed markets, respectively, and find that spillovers rate critically affects contrasting results. We show that a simultaneous-move (sequential-move) appears in a private duopoly if the spillovers rate is low (high) while a sequential-move appears in a mixed duopoly irrespective of spillovers. We also show that public leadership is the only equilibrium if the spillovers rate is intermediate and its resulting welfare is the highest. This suggests that the implementation of privatization policy transforms a public leader to a private competitor, which can decrease the social welfare.