On the instability of the R&D portfolio in a dynamic monopoly. Or, one cannot get two eggs in one basket

Luca Lambertini (), Raimondello Orsini and Arsen Palestini

International Journal of Production Economics, 2017, vol. 193, issue C, 703-712

Abstract: Firms' innovation portfolios include several dimensions ranging from organizational aspects to cost reduction and product characteristics. All of these efforts take place during the product life cycle, and interact with each other in determining the spectrum of features of the product and its performance on the market. This paper contributes to the related theoretical debate, focussing on the possibility of having superior product quality levels at lower marginal production cost over time. To deal with this issue, we investigate the optimal R&D portfolio of a single-product monopolist investing in cost-reducing activities accompanied by efforts improving the quality of its product over an infinite time horizon. It turns out that the firm's relative incentives along the two directions are conditional upon market affluence, measured by consumers' willingness to pay for quality, and R&D efforts are complements in the neighbourhood of the steady state equilibrium. However, the dynamics of the two R&D controls depend on both quality and marginal cost at every instant. Consequently, as the stability analysis reveals, the steady state equilibrium is indeed unstable due to the dynamics of marginal cost, thereby implying that one should not expect the firm to supply an increasing quality level at a decreasing production cost. Hence, the dynamic interplay between R&D controls and the resulting instability affecting production costs also imply that one may not expect to observe product quality to increase and market price to decrease over the product life cycle.

Keywords: Process innovation; Monopoly; Product quality; R&D (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0925527317302748
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:193:y:2017:i:c:p:703-712

DOI: 10.1016/j.ijpe.2017.08.030

Access Statistics for this article

International Journal of Production Economics is currently edited by Stefan Minner

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().