Cournot and Bertrand Competition in a Differentiated Duopoly with Endogenous Technology Adoption

We study firms' endogenous technology adoption in a two-stage differenti- ated duopoly game. Firms choose technologies from a continuous technology set in stage one, and engage in either Cournot or Bertrand competition in stage two. If the technology set is sufficiently convex and the degree of product dif- ferentiation is sufficiently high, we find that (i) Bertrand competition leads to more interior technology choices than Cournot competition, and (ii) Cournot competition induces a greater incentive to innovate for both firms. Further- more, welfare analysis shows that Bertrand competition always yields higher consumer surplus and social welfare than Cournot competition although the marginal cost of production is higher.