Skip to main content
Log in

Product Reliability, R&D, and Manufacturing Cost Shocks

  • Published:
Atlantic Economic Journal Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10

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.

    Google Scholar 

  • d'Aspremont, C., & Jacquemin, A. (1990). Cooperative and noncooperative R\&D in duopoly with spillovers: erratum. American Economic Review, 80(3), 641–642.

    Google Scholar 

  • Daughety, A. F., & Reinganum, J. F. (1995). Product safety: liability, R&D, and signaling. American Economic Review, 85(5), 1187–1206.

    Google Scholar 

  • DeCourcy, J. (2005). Cooperative R&D and strategic trade policy. Canadian Journal of Economics, 38(2), 546–573.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Google Scholar 

  • Jinji, N., & Toshimitsu, T. (2006). Optimal policy for product R&D with endogenous quality ordering: asymmetric duopoly. Australian Economic Papers, 45(2), 127–140.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Saha, S. (2007). Consumer preferences and product and process R&D. RAND Journal of Economics, 38(1), 250–268.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Jannett Highfill.

Electronic Supplementary Material

ESM 1

(TEX 1 kb)

ESM 2

(PDF 83 kb)

ESM 3

(DOCX 30 kb)

ESM 4

(NB 251 kb)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

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

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11293-017-9565-3

Keywords

JEL

Navigation