Abstract

We analyse R&D activity in transport and communication technology (TCRD), in a Cournot duopoly. Transport and communication costs are of the iceberg type, i.e., using up some portion of the product along its path to the final buyer. Firms invest in TCRD to increase the net amount of the product that reaches consumers. A variety of equilibria arise as a result of the different levels of TCRD e¢ciency. If TCRD’s productivity is high, the game is a prisoner’s dilemma where both firms invest in TCRD. As the eficiency of the TCRD progressively fades we come across first a chicken game and, then, at lower e¢ciency, a game with an equilibrium in dominant strategies where the profits are at the highest. Social welfare is maximised by market strategies only when TCRD is very eficient.