Private and Social Incentives Towards Investment in Product Differentiation

We consider a dynamic oligopoly where firms invest to increase product differentiation and an externality effect operates in the R&D activity. We compare the steady state solutions under alternative decision rules, namely, the open-loop and the closed-loop Nash equilibrium. Significant differences emerge, as concerns the effect of the number of firms upon the optimal degree of product differentiation. We also compare the private optima with the social optimum, and derive implications concerning the social desirability of different decision rules.