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Process R&D in Monopoly under Demand Uncertainty

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  • L. Lambertini

Abstract

I investigate R&D efforts for process innovation in a monopoly with uncertain demand. Two different models are proposed, where either (i) the reservation price is affected by an additive shock and the marginal production cost is increasing, or (ii) a multiplicative shock on the slope of demand combines with a flat marginal production cost. In either case, price-setting behaviour generates a larger R&D investment than quantity-setting behaviour. An Arrovian interpretation of the first result and a Schumpeterian interpretation of the second are proposed.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 507.

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Date of creation: 2004
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Handle: RePEc:bol:bodewp:507

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  1. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, American Economic Association, vol. 62(3), pages 278-91, June.
  3. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 61(1), pages 65-73, March.
  4. Paul Klemperer & Margaret Meyer, 1986. "Price Competition vs. Quantity Competition: The Role of Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 618-638, Winter.
  5. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
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