Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 18: Process Innovations in a Duopoly with Two Region

Olof Ejermo () and Börje Johansson ()
Additional contact information
Olof Ejermo: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: Royal Institute of Technology, Centre of Excellence for Science and Innovation Studies, Department of Infrastructure, Drottning Kristinas väg 30B, 100 44 Stockholm, Sweden, and, Jönköping International Business School/Internationella Handelshögskolan i Jönköping AB, P.O. Box 1026, SE-551 11 Jönköping, Sweden, , , Sweden
Börje Johansson: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: Royal Institute of Technology, Centre of Excellence for Science and Innovation Studies, Department of Infrastructure, Drottning Kristinas väg 30B, 100 44 Stockholm, Sweden, and, Jönköping International Business School/Internationella Handelshögskolan i Jönköping AB, P.O. Box 1026, SE-551 11 Jönköping, Sweden, , Drottning Kristinas väg 30B, 100 44 Stockholm, Sweden, and, Jönköping International Business School/Internationella Handelshögskolan i Jönköping AB, P.O. Box 1026, SE-551 11 Jönköping, Sweden, , Sweden

Abstract: Most models of duopolies with a spatial dimension refer to the 'linear' or 'circular' city. Moreover, in duopoly models with innovations, the spatial dimension is usually dropped. We bridge this gap by constructing a model with two regions, each hosting production of a differentiated quality (high and low quality). In addition, consumers are heterogeneous with different willingness to pay for quality. The analysis focuses on the incentives for process innovations which affect the unit cost of production. The model is used to analyze two common trends in the urbanization process and their effects on the incentive for process innovations. The first is increased transportation costs and worsened interregional accessibility (the result is reversed for a decrease in transportation costs). We find that such changes increase the amount of process R&D more in the region producing a low-quality good than in the region producing a high-quality good. Second, we examine the effect on optimal process R&D of moving consumers from the region producing low-quality goods to the region producing high-quality goods. This lowers the optimal amount of process R&D undertaken in the region producing the low-quality good, while it is raised in the other region.

Keywords: Regional agglomeration; process innovations; duopoly

JEL-codes: C72; L13; O31; R30

26 pages, November 29, 2004

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