R&D competition in a spatial model with technical risk*

Abstract. In this paper, we introduce stochastic R&D into a Hotelling model with two duopolists. With an emphasis on the interaction between firms' R&D decision and location choice, we compare socially and privately optimal locations and levels of R&D. We show that, depending on R&D cost and the degree of technical risk, equilibrium location varies from minimum differentiation to maximum differentiation. From a welfare perspective, the equilibrium distance between the two firms could be either closer, farther or socially best. Moreover, depending on cost structure, firms' R&D expenditures could be either higher, lower or socially optimal, from a welfare viewpoint.