On the dynamic efficiency of Bertrand and Cournot equilibria

This paper compares Bertrand and Cournot equilibria in a differentiated duopoly with R&D (research and development) competition. It shows that Cournot competition induces more R&D effort than Bertrand competition. However, the price is lower and output is larger in Bertrand than in Cournot competition. Furthermore, the Bertrand equilibrium is more efficient than the Cournot equilibrium if either R&D productivity is low, or spillovers are weak, or products are very different. If R&D productivity is high, spillovers are strong, and goods are close substitutes, then the Bertrand equilibrium is less efficient than the Cournot equilibrium. Journal of Economic Literature Classification Number: L13. (C) 1997 Academic Press