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Market and Technical Risk in R&D

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  • Gerlach, Heiko A.
  • Rønde, Thomas
  • Stahl, Konrad

Abstract

We endogenize the market risk (at given technical risk) in firms’ R&D decisions by introducing stochastic R&D in the Hotelling model. It is shown that if the technical risk is sufficiently high, the market risk remains low even if firms pursue similar projects. This leads firms to focus on the most valuable market segment. We then also endogenize technical risk by allowing firms to choose their R&D technology. In equilibrium, firms either pursue similar (different) R&D projects with risky (safe) technologies or they choose the same project but apply different R&D technologies. We show that R&D spillovers lead to more differentiated R&D efforts and patent protection to less. Project coordination within a RJV implies more differentiation, and may, or may not be welfare-improving.

Suggested Citation

  • Gerlach, Heiko A. & Rønde, Thomas & Stahl, Konrad, 2002. "Market and Technical Risk in R&D," CEPR Discussion Papers 3450, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3450
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    References listed on IDEAS

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    1. Katz, Michael L & Shapiro, Carl, 1986. "Product Compatibility Choice in a Market with Technological Progress," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 146-165, Suppl. No.
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    3. 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.
    4. Dasgupta, Partha & Maskin, Eric, 1987. "The Simple Economics of Research Portfolios," Economic Journal, Royal Economic Society, vol. 97(387), pages 581-595, September.
    5. Irmen, Andreas & Thisse, Jacques-Francois, 1998. "Competition in Multi-characteristics Spaces: Hotelling Was Almost Right," Journal of Economic Theory, Elsevier, vol. 78(1), pages 76-102, January.
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    8. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
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    More about this item

    Keywords

    Market Risk; R&D Project Choice; Technical Risk;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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