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Market and Technical Risk in R&D

32 Pages Posted: 29 Aug 2002

See all articles by Heiko A. Gerlach

Heiko A. Gerlach

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS)

Thomas Rønde

University of Copenhagen - Department of Economics; Center for Economic and Business Research (CEBR); Centre for Economic Policy Research (CEPR)

Konrad O. Stahl

University of Mannheim - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 2002

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.

Keywords: Market risk, technical risk, R&D project choice

JEL Classification: D81, L13, O32

Suggested Citation

Gerlach, Heiko A. and Rønde, Thomas and Stahl, Konrad O., Market and Technical Risk in R&D (July 2002). Available at SSRN: https://ssrn.com/abstract=325366

Heiko A. Gerlach (Contact Author)

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 44 58 28 81 (Phone)
+33 1 44 58 28 80 (Fax)

Thomas Rønde

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+64 9 532 3014 (Phone)
+64 9 532 3000 (Fax)

Center for Economic and Business Research (CEBR) ( email )

Porcelaenshaven, Bldg 65
DK-2000 Frederiksberg
Denmark

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Konrad O. Stahl

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181 1875 (Phone)
+49 621 181 1874 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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