When small firms fight back against large firms

When small firms fight back against large firms in R&D activities Joint work with Noriaki Matsushima OT 2010 1

Plan of the Presentation (1) Helping minor firm reduces welfare. (2) R&D investments and firm size (3) Helping minor firm reduces consumer surplus (4) Strategic incentive of R&D investment in a asymmetric location price model OT 2010 2

Helping minor firms reduces welfare OT 2010 3

Lahiri and Ono (1988) A decrease in the cost of minor firm (the firm with higher cost) can reduce welfare Welfare-reducing production substitution ・A decrease of the marginal cost of the firm with higher cost reduces the output of the firm with lower marginal cost →It increases total production cost and reduces welfare OT 2010 4

Welfare-reducing production substitution reaction curve of firm 1 Y 2 reaction curve of firm 2 0 OT 2010 Y 1 5

Helping minor firm can reduce welfare (a) welfare-reducing production substitution (b) An increase the total output improves consumer welfare. (a) can dominate (b). It more likely occurs when the cost difference is large. OT 2010 6

Helping minor firm in the Hotelling model Maximal differentiation A decrease of the minor firm (firm 2) increases the share of firm 2 and reduces the share of firm 1 It can reduce social welfare, while it always improves consumer surplus. OT 2010 7

Excess entry theorem In imperfect competitive markets, a slight reduction of the number of entering firms at the free entry equilibrium improves welfare ~excess entry theorem. However, it reduces consumer welfare. OT 2010 8

our paper Helping minor firm can reduce consumer surplus (and total social surplus). OT 2010 9

Welfare Implication 弱い企業が少し強くなり差が縮まる (a) 立地を所与とすれば、価格競争は強まる (b) 企業１がより端に立地し、価格競争が弱まる (b)の効果が強いとconsumer surplusが下がってしまう →helping minor firm reduces consumer surplus (c) 強い企業のマーケットシェアが下がり、welfarereducing production substitutionが起こる。 Helping minor firm distorts the product positioning of the major firm and can reduce both consumer surplus and total social surplus. OT 2010 14