Cooperating and Non-cooperating Firms in Inventive and Absorptive Research

We consider a duopoly competing in quantity, where firms can invest in both innovative and absorptive research and development to reduce their unit production cost, and where they benefit from free spillovers between them. We analyze the case where firms act non-cooperatively and the case where they cooperate by forming a research joint venture. We show that, in both modes of play, there exists a unique symmetric solution. We find that the level of investment in innovative research and development is always the highest and that the efficiency of investment in absorptive research has almost no impact on the equilibrium solution.