Atlantic Economic Journal

, Volume 46, Issue 1, pp 27–42 | Cite as

Product Reliability, R&D, and Manufacturing Cost Shocks

Article
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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.

Keywords

Research and development Innovation competition Product reliability Replacement cost 

JEL

D21 O31 F12 

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Copyright information

© International Atlantic Economic Society 2018

Authors and Affiliations

  1. 1.Department of EconomicsBradley UniversityPeoriaUSA
  2. 2.Department of MathematicsBradley UniversityPeoriaUSA

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