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Project Choice and Risk in R&D

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Author Info
Heiko A. Gerlach (University of Auckland)
Thomas Rønde (Institute of Economics, University of Copenhagen)
Konrad Stahl (University of Mannheim)

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Abstract

We introduce stochastic R&D in the Hotelling model and show that if the technical risk is sufficiently high, all firms focus on the most valuable market segment. We then endogenize technical risk by allowing firms to choose between a safe and a risky R&D technology. In equilibrium, firms either both target the most attractive market with at least one firm using the risky technology or they choose different niche projects and both apply the safe R&D technology. We show that R&D spillovers lead to more differentiated R&D projects and patent protection to less. Project coordination within a RJV implies more differentiation, and may be welfare-improving.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2004-01.

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Length: 32 pages
Date of creation: Jan 2004
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Handle: RePEc:kud:kuieci:2004-01

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Related research
Keywords: technical risk; R&D project choice; technological spillovers; research joint ventures;

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

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References listed on IDEAS
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  1. Sudipto Bhattacharya & Dilip Mookherjee, 1986. "Portfolio Choice in Research and Development," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 594-605, Winter.
    Other versions:
  2. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  3. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December. [Downloadable!] (restricted)
  4. James Cardon & Dan Sasaki, 1998. "Preemptive Search and R&D Clustering," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 324-338, Summer. [Downloadable!] (restricted)
    Other versions:
  5. Ted O'Donoghue & Suzanne Scotchmer & Jacques-François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 7(1), pages 1-32, 03. [Downloadable!] (restricted)
  6. Harter, John F R, 1993. "Differentiated Products with R&D," Journal of Industrial Economics, Blackwell Publishing, vol. 41(1), pages 19-28, March. [Downloadable!] (restricted)
  7. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September. [Downloadable!] (restricted)
  8. Himmelberg, Charles P & Petersen, Bruce C, 1994. "R&D and Internal Finance: A Panel Study of Small Firms in High-Tech Industries," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 38-51, February. [Downloadable!] (restricted)
    Other versions:
  9. Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Blackwell Publishing, vol. 34(2), pages 217-23, December. [Downloadable!] (restricted)
  10. Dasgupta, Partha & Maskin, Eric, 1987. "The Simple Economics of Research Portfolios," Economic Journal, Royal Economic Society, vol. 97(387), pages 581-95, September. [Downloadable!] (restricted)
  11. Choi, Jay Pil, 1993. "Cooperative R&D with product market competition," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 553-571. [Downloadable!] (restricted)
  12. Vettas, Nikolaos, 1999. "Location as a Signal of Quality," CEPR Discussion Papers 2165, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Helmut Bester, 1998. "Quality Uncertainty Mitigates Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 828-844, Winter. [Downloadable!] (restricted)
  14. Andreas IRMEN & Jean-François THISSE, 1996. "Competition in Multi-Characteristics Spaces: Hotelling Was Almost Right," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9613, Université de Lausanne, Faculté des HEC, DEEP.
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  15. Duranton, Gilles, 2000. "Cumulative Investment and Spillovers in the Formation of Technological Landscapes," Journal of Industrial Economics, Blackwell Publishing, vol. 48(2), pages 205-13, June. [Downloadable!] (restricted)
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