On Market Integration and Product R&D: A Monopoly Case

Applying a monopoly model with endogenous quality choice to the case of multiple national markets, we consider the effect of market integration on product R&D incentives (i.e., quality-improving), profit, and consumer surplus. We demonstrate that the effect of market integration depends on the difference in income distributions between two countries and the level of trade cost. In particular, if the difference in income distributions between two countries is large (small) and/or trade cost is low (high), market integration can decrease (increase) the level of product quality and social welfare in the two countries.