Strategic R&D and the Innovation of Products: Understanding the Role of Time Preferences and Product Differentiation

Economics of Innovation and New Technology, Vol. 26, Iss. 7, 2017

Posted: 8 Nov 2016 Last revised: 24 Aug 2017

Date Written: November 6, 2016

Abstract

We evaluate the effects of innovation on competition using an optimal control approach that incorporates firms’ time preferences. Using a model where firm(s) innovates by investing in research and development to create a more appealing product for heterogeneous consumers, we examine conditions that maximize social welfare. When firm(s) choose discount rate regardless of market structure, a monopoly will develop more innovative products. However, we show that duopolies may increase innovation if competition alters firms’ outlook. Finally, we identify firm incentives to behave myopically, which in the context of collusion may impede industry-wide innovation.

Keywords: Dynamic R&D, Product Appeal, Firm Outlook

JEL Classification: L15, O32, C6

Suggested Citation

Walter, Jason M. and Peterson, Jeffrey M., Strategic R&D and the Innovation of Products: Understanding the Role of Time Preferences and Product Differentiation (November 6, 2016). Economics of Innovation and New Technology, Vol. 26, Iss. 7, 2017 . Available at SSRN: https://ssrn.com/abstract=2865722

Jason M. Walter (Contact Author)

University of Wisconsin - Stout ( email )

Menomonie , WI 54751
United States

Jeffrey M. Peterson

Independent

No Address Available

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