Price Sensitive Consumers and R&D Network Formation
39 Pages Posted: 15 Feb 2019
Date Written: February 5, 2019
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
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