A typical assumption in the game-theoretic literature on research and development (R&D) is that all firms belonging to the industry under investigation pursue R&D activities. In this paper, we assume that the industry is composed of two groups; the first (the investors) is made of firms that have R&D facilities and are involved in this type of activity. The second group corresponds to firms that are inactive in R&D (the surfers). The latter group benefits from its competitors' R&D efforts, thanks to involuntary spillovers. This division of the industry is in line with actual practice, where indeed, not all firms are engaged in costly and risky R&D. We adopt a two-stage game formalism where, in the first stage investors decide on their levels of investment in R&D, and in the second stage, all firms compete à la Cournot in the product market. We characterize and analyze the unique subgame perfect Nash equilibrium.
Published January 2007 , 19 pages