Product Reliability, R&D, and Manufacturing Cost Shocks

Product Reliability, R&D, and Manufacturing Cost Shocks Suppose a firm’s research and development (R&D) improves product reliability which in turn decreases the cost of product failure for both the firm and its customers. The primary research question of the paper is how a firm with market power optimally adjusts its R&D if it experiences a manufacturing cost shock. Our model suggests that a manufacturing cost shock prompts the firm to do less R&D in the cases where the replacement cost is low or the marginal manufacturing cost is high. Conversely, if the replacement cost is high and the marginal manufacturing cost is low, then the firm increases R&D, mitigating some of the increase in the manufacturing cost. The paper also compares the outcomes for reliability, profits, consumer surplus, and social surplus for the optimal R&D case as compared to the case of doing no R&D, paying particular attention to how exogenous changes in the marginal manufacturing cost affect this comparison. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Atlantic Economic Journal Springer Journals

Product Reliability, R&D, and Manufacturing Cost Shocks

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Publisher
Springer US
Copyright
Copyright © 2018 by International Atlantic Economic Society
Subject
Economics; Economics, general; Macroeconomics/Monetary Economics//Financial Economics; Microeconomics; International Economics; Public Finance
ISSN
0197-4254
eISSN
1573-9678
D.O.I.
10.1007/s11293-017-9565-3
Publisher site
See Article on Publisher Site

Abstract

Suppose a firm’s research and development (R&D) improves product reliability which in turn decreases the cost of product failure for both the firm and its customers. The primary research question of the paper is how a firm with market power optimally adjusts its R&D if it experiences a manufacturing cost shock. Our model suggests that a manufacturing cost shock prompts the firm to do less R&D in the cases where the replacement cost is low or the marginal manufacturing cost is high. Conversely, if the replacement cost is high and the marginal manufacturing cost is low, then the firm increases R&D, mitigating some of the increase in the manufacturing cost. The paper also compares the outcomes for reliability, profits, consumer surplus, and social surplus for the optimal R&D case as compared to the case of doing no R&D, paying particular attention to how exogenous changes in the marginal manufacturing cost affect this comparison.

Journal

Atlantic Economic JournalSpringer Journals

Published: Jan 29, 2018

References

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