Consider a two-stage game in which at t = 1, firms determine (first noncooperatively and then coopera- tively) how much to invest in cost-reducing R&D and at t = 2, firms are engaged in a Cournot quantity game. Firms produce a homogeneous product, where the demand function is given by p = 125 -Q. In addition, x; denotes the amount of R&D undertaken by firm i, i = 1, 2, and the unit production cost of firm i is ci(X1, X2) = 30 - xi - 0.6x]. Finally, R&D is costly to firms TC(xi) = 2