Dynamic Firm R&D Games: Manufacturing Costs and Reliability Paths

Jannett Highfill (highfill@bradley.edu) and Michael McAsey (mcasey@bradley.edu)
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Michael McAsey: Department of Mathematics, Bradley University, USA

Review of Economics & Finance, 2013, vol. 3, 1-14

Abstract: Consider a dynamic intra-industry trade model with two goods, two firms, and two countries in which product ¡°reliability¡± is determined by R&D paths. This paper focuses on how a change in competitive conditions in terms of manufacturing costs affects the firms¡¯ decision about optimal reliability. Briefly, the main result of the paper is that when the manufacturing costs are similar and closely track each other, a lower manufacturing cost prompts both firms to increase their R&D and product reliability. But when the manufacturing costs are not similar, either before or after the change, the results are quite different. A profit maximizing firm will sometimes take advantage of a reduction in its own manufacturing cost by actually doing less R&D¡ªand thus producing a less reliable product.

Keywords: Differential game; Innovation competition; Product reliability (search for similar items in EconPapers)
JEL-codes: D92 F12 O31 (search for similar items in EconPapers)
Date: 2013
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