Essays on research and development in a differentiated-products model

John Francis Reel Harter, Purdue University

Abstract

This dissertation attempts to look to the literature on product-differentiation models in a characteristics setting and add to it a process of R&D. Previous studies have assumed simultaneous and instantaneous entry or a known order of sequential entry. Here, the R&D process is such that the sequence of entry is uncertain, and the effects of profits earned before both firms have entered is not ignored. The first essay deals with setting up the model and looking at the equilibria resulting from the possible ranges of costs to R&D. The results indicate that, for certain ranges of costs to R&D, the unique variety choices are minimum-differentiation choices in order to induce the non-innovating firm to exit the market, creating a permanent monopoly in that class of goods. When the fixed costs to R&D are low or when imitation is a profitable alternative for the non-innovating firm, the resulting equilibrium is often found to yield neither minimum nor maximum differentiation. In the second essay, a patent system is added to the model. A patent might increase the inventor's profits, but also increases the probability of imitation by the competing firm. It is found that an innovator might or might not patent, depending on the parameters, the equilibrium being played, and the results of the race to innovate. This gives a companion explanation for the imperfect correlation between innovation and patenting to that put forth by Horstmann et al. The third essay is concerned with the addition of some uncertainty about the nature of demand--the specific range of varieties which are most preferred is not known. In order to anchor this with the product-differentiation literature, the simultaneous-entry equilibrium is found. Rather than yielding the maximum-differentiation result of d'Aspremont et al., the equilibrium has two firms locating slightly inside the boundaries of the interval. When R&D is added, it is found that the initial innovator might be willing to decrease some of its monopoly flow profits if it can favorably alter the follower's response (by hiding the location of demand).

Degree

Ph.D.

Advisors

Weinberg, Purdue University.

Subject Area

Economic theory|Business community

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