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
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: Suggested Citation