We introduce a model with the possibility of investing in basic research prior to non-cooperative applied research and quantity competition, comparing two scenarios: Centralized (C) where the State invests in basic research and makes the results available to firms; and Decentralized (D) where firms have to invest in basic research. Total basic research effort acts as a multiplier of firms’ effort in applied research in the reduction of production costs. Interestingly, (i) there is no upper-bound on the number of viable firms under both scenarios, while there is a lower-bound on that number under (D) scenario; (ii) it may be socially optimal under (C) or (D) to have a finite number of firms; (iii) the firms’ expenses in research is either increasing or inverted U-shaped with market concentration, as in a large part of existing empirical literature; (iv) when the basic research cost is low, under (C), it is possible to implement the first best (the optimal number of firms) and a firm’s taxation to fund the optimal basic research expenses in an acceptable way to firms relative to the (D) scenario. When the basic research cost is intermediate, it is possible to implement the second best number of firms defined to be as the one allowing to cover the basic research expenses in an acceptable way to firms relative to the (D) scenario.
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