Abstract
Suppose a firm’s research and development (R&D) improves product reliability which in turn decreases the cost of product failure for both the firm and its customers. The primary research question of the paper is how a firm with market power optimally adjusts its R&D if it experiences a manufacturing cost shock. Our model suggests that a manufacturing cost shock prompts the firm to do less R&D in the cases where the replacement cost is low or the marginal manufacturing cost is high. Conversely, if the replacement cost is high and the marginal manufacturing cost is low, then the firm increases R&D, mitigating some of the increase in the manufacturing cost. The paper also compares the outcomes for reliability, profits, consumer surplus, and social surplus for the optimal R&D case as compared to the case of doing no R&D, paying particular attention to how exogenous changes in the marginal manufacturing cost affect this comparison.
Similar content being viewed by others
References
d'Aspremont, C., & Jacquemin, A. (1988). Cooperative and noncooperative R&D in duopoly with spillovers. American Economic Review, 78(5), 1133–1137.
d'Aspremont, C., & Jacquemin, A. (1990). Cooperative and noncooperative R\&D in duopoly with spillovers: erratum. American Economic Review, 80(3), 641–642.
Daughety, A. F., & Reinganum, J. F. (1995). Product safety: liability, R&D, and signaling. American Economic Review, 85(5), 1187–1206.
DeCourcy, J. (2005). Cooperative R&D and strategic trade policy. Canadian Journal of Economics, 38(2), 546–573.
El Ouardighi, F., Shnaiderman, M., & Pasin, F. (2014). Research and development with stock-dependent spillovers and price competition in a duopoly. Journal of Optimization Theory and Applications, 161(2), 626–647. https://doi.org/10.1007/s10957-013-0433-2.
Gretz, R. T., Highfill, J., & Scott, R. C. (2009). Strategic research and development policy: societal objectives and the corporate welfare argument. Contemporary Economic Policy, 27(1), 28–45.
Haaland, J., & Kind, H. J. (2006). Cooperative and non-cooperative R&D policy in an economic union. Review of World Economics/Weltwirtschaftliches Archiv, 142(4), 720–745.
Haaland, J. I., & Kind, H. J. (2008). R&D policies, trade and process innovation. Journal of International Economics, 74(1), 170–187. https://doi.org/10.1016/j.jinteco.2007.04.001.
Highfill, J., & McAsey, M. (2010). Dynamic product reliability management for a firm with a complacent competitor vs. a lockstep competitor. Journal of Economics (MVEA), 36(1), 29–54.
Jinji, N., & Toshimitsu, T. (2006). Optimal policy for product R&D with endogenous quality ordering: asymmetric duopoly. Australian Economic Papers, 45(2), 127–140.
Ma, Y. (2015). The product cycle hypothesis: the role of quality upgrading and market size. International Review of Economics and Finance, 39, 326–336. https://doi.org/10.1016/j.iref.2015.04.014.
Saha, S. (2007). Consumer preferences and product and process R&D. RAND Journal of Economics, 38(1), 250–268.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Highfill, J., McAsey, M. Product Reliability, R&D, and Manufacturing Cost Shocks. Atl Econ J 46, 27–42 (2018). https://doi.org/10.1007/s11293-017-9565-3
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11293-017-9565-3