Strategic R&D Investment in Future Comopatibility

Mikko Mustonen
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Mikko Mustonen: University of Helsinki, Dept. of Economics, Helsinki, Finland

Homo Oeconomicus, 2000, vol. 17, 303-315

Abstract: The future compatibility of a product can be important to a buyer. With IT products, switching costs may in the worst case well exceed the purchasing price. We develop a model in which rational buyers value products by their expected levels of future compatibility, using suppliers' R&D budget levels as signals. Suppliers compete by investing in R&D to increase compatibility. In all the analysed market scenarios R&D investment levels fall short of the social optimum. Welfare closest to optimum is reached when suppliers collude in R&D but compete in product markets.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:hom:homoec:v:17:y:2000:p:303-315

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