Price Sensitive Consumers and R&D Network Formation

39 Pages Posted: 15 Feb 2019

See all articles by Pascal Billand

Pascal Billand

Jean Monnet University

Christophe Bravard

Jean Monnet University, Saint-Etienne - CREUSET

Sudipta Sarangi

Virginia Polytechnic Institute & State University

Myrna H. Wooders

Vanderbilt University - College of Arts and Science - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 5, 2019

Abstract

We introduce a price oligopoly model with informed and uninformed consumers, thus creating a new channel of influence for collaborative R&D. Firms can establish pair-wise collaborative research links with other firms to lower production costs. Informed consumers buy from the lowest cost firms while uninformed consumers buy from any firm whose price does not exceed their reservation prices. In contrast to earlier models of price setting oligopolies which result in no R&D, our model can lead to positive levels of R&D collaborations. It also leads to increased social welfare, since increased R&D collaborations lower productions costs. Although uninformed consumers pay higher prices, informed consumers are better off as higher R&D leads to lower marginal costs and prices. We then allow for heterogeneity in consumers reservation prices or firm profits and again find higher levels of R&D. Interestingly, under such heterogeneity, the size of the stable collaborative group increases as R&D costs increase. Finally, we extend the model by introducing different markets where several firms compete for the uninformed consumers. We now find an interesting pattern of R&D activity; in equilibrium, each market has only one active firm and firms collaborate only with (active) firms that do not operate in their own markets.

Keywords: Networks, Collaboration, Price Competition

JEL Classification: C70, L13, L20, D85

Suggested Citation

Billand, Pascal and Bravard, Christophe and Sarangi, Sudipta and Wooders, Myrna H., Price Sensitive Consumers and R&D Network Formation (February 5, 2019). Available at SSRN: https://ssrn.com/abstract=3329546 or http://dx.doi.org/10.2139/ssrn.3329546

Pascal Billand

Jean Monnet University ( email )

34, rue Francis Baulier
Saint-Etienne, 42023
France

Christophe Bravard

Jean Monnet University, Saint-Etienne - CREUSET ( email )

34, rue Francis Baulier
Saint-Etienne, 42023
France

Sudipta Sarangi (Contact Author)

Virginia Polytechnic Institute & State University ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

Myrna H. Wooders

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

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