Product differentiation, process R&D, and the nature of market competition

We investigate the relationship between process and product RandD and compare the incentives for both types of RandD under different modes of market competition (Bertrand versus Cournot). It is shown that: (i) process RandD investments increase with the degree of product differentiation and firms invest more in product RandD when they can do process RandD than when they cannot; (ii) Bertrand firms have a stronger incentive for product RandD whereas Cournot firms invest more in process RandD; and (iii) cooperation in product RandD promotes both types of RandD relative to competition whereas cooperation in both types of RandD discourages RandD relative to cooperation in just product RandD.