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Process R&D in Monopoly under Demand Uncertainty

  • Luca Lambertini

    ()

    (Department of Economics, University of Bologna)

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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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 15 (2006)
Issue (Month): 14 ()
Pages: 1-9

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Handle: RePEc:ebl:ecbull:eb-04o30007
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  1. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  2. 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.
  3. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  5. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
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