Market Share Restrictions and Efficiency

This paper studies the effects of market share restrictions on research and development activities of firms. Market share of firms is closely followed by regulatory authorities and restrictions are applied in many cases around the world. This essay investigates if these restrictions affect the cost reduction based R&D efforts of the firms in a market. The question asked is important in the sense that countries with different regulations on market share, end up having different innovative structures, which in turn affect their economic growth and well-being. The paper uses a Cournot model, which shows that under the no exit assumption, market share restrictions lower the level of competition and possible rewards from R&D efforts, therefore causing smaller levels of R&D efforts both for big and small firms in the market.