Should We Enhance or Restrict Technological Diffusion from Major to Minor Firms?

Abstract

This study examines how technological diffusion from a major firm to a minor firm affects social welfare via R & D competition in an asymmetric Cournot duopoly. We assume that the minor firm can decrease its production cost because of the spillover effect arising through R & D by the major firm. R & D by the minor firm depends on the free-riding effect and a taking-away effect that removes market share from the major firm. If given a low R & D cost, both firms invest in R & D with an appropriate level of technological diffusion, we can obtain a high level of social welfare. However, an increase in the level of technological diffusion could make the major firm abandon R & D activity. Given a high R & D cost, a high level of welfare can be obtained only with a low level of technological diffusion because the potential presence of technological diffusion easily disrupts R & D by the major firm.