Stochastic innovation and product market organization

Stanley S. Reynolds, R. Mark Isaac

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Abstract

This paper analyzes how different types of product market organization affect firms' R&D investments in a stochastic innovation framework. Product market competition determines payoffs to successful and unsuccessful firms. Restrictions on the research project success probability distribution are identified that yield an invariance result for expenditure per R&D project. The impact of the number of firms (n) on the amount of market R&D is shown to be sensitive to product market organization. For a major process innovation, firms undertake more R&D projects under Cournot product market competition than under Bertrand competition, for n sufficiently large. A numerical example is used to illustrate welfare tradeoffs.

Original languageEnglish (US)
Pages (from-to)525-545
Number of pages21
JournalEconomic Theory
Volume2
Issue number4
DOIs
StatePublished - Dec 1 1992

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ASJC Scopus subject areas

  • Economics and Econometrics

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