Endogenous spillovers in a non-tournament R&D duopoly under uncertainty

Including R&D risk, this paper considers the choices of R&D spillovers in a simple non-tournament cost-reducing R&D duopoly game with Bertrand competition. It turns out that the two firms never disclose any of their R&D information when considering their R&D non-cooperatively. However, if the firms decide their R&D cooperatively, we show, though they would always fully share their information when the risk of R&D is low, they would not disclose any of their R&D information when the market competition is fierce, the R&D risk is high and the R&D is efficient.     

Should Firms Employ Personalized Pricing?

This paper theoretically considers a duopoly model in which all firms do not always employ personalized pricing. Our model incorporates the fact that firms engage in marginal cost‐reducing activities after they decide whether to employ personalized pricing. When the ex ante cost difference between the firms is large, the less‐efficient firm does not employ personalized pricing even when the fixed cost to do so is zero. This is because employing personalized pricing induces the rival firm to engage more in reducing its costs, which is more likely to harm the less‐efficient firm.     

The Welfare Effects of the National Cooperative Research Act (NCRA) of 1984 and the National Cooperative Production Amendments (NCPA) of 1993

A bstract .   Cooperative R&D and production joint ventures may enable firms to achieve significant cost efficiencies. However, they can also be a means of controlling industry output and raising product prices. A review of the literature on the welfare implications of allowing rival firms to cooperate in the R&D and production stages indicates that the issue is controversial from a theoretical perspective. There is need to examine the motivations of R&D and production joint ventures in order to assess the welfare implications of the National Cooperative Research Act (NCRA) of 1984 and National Cooperative Production Amendments (NCPA) of 1993, which relaxed the antitrust treatment of R&D and production joint ventures. Using samples of 127 cooperative R&D joint ventures and 342 cooperative production joint ventures announced by U.S. domestic firms during 1979–1999, this article finds that these endeavors do not meet the criteria for collusive behavior specified by the market power doctrine. We interpret these findings as suggesting that cooperative R&D and production joint ventures are motivated by cost efficiencies and are, therefore, welfare enhancing. Our results pose some challenges to the doctrine that antitrust actions by regulatory authorities are always welfare improving.     

Real options game models of R&D competition between asymmetric firms with spillovers

Using real options game models, we consider the characterization of strategic equilibria associated with an asymmetric Research and Development (R&D) race between an incumbent firm and an entrant firm in the development of a new innovative product under market and technological uncertainties. The random arrival time of the discovery of the patent protected innovative product is modeled as a Poisson process. Input spillovers on the R&D effort are modeled by the change in the leader’s hazard rate of success of innovation upon the follower’s entry into the R&D race. Asymmetry between the two competing firms include sunk costs of investment, stochastic revenue flow rates generated from the product, and hazard rates of arrival of success of R&D efforts of the two firms. Under asymmetric duopoly, we obtain the complete characterization of the three types of Markov perfect equilibria (sequential leader–follower, preemption and simultaneous entry) of the firms’ optimal R&D entry decisions with respect to various sets of model parameters. Our model shows that under positive input spillover, preemptive equilibrium does not occur in the R&D race due to the presence of dominant second mover advantage. The two firms choose optimally to enter simultaneously if the sunk cost asymmetry is relatively small; otherwise, sequential equilibrium would occur. When the initial hazard rate is low relative to the level of input spillover, simultaneous entry would occur as an optimal decision, signifying another scenario of dominant second mover advantage. On the other hand, when the initial hazard rate is sufficiently high so that the first mover advantage becomes more significant, simultaneous equilibrium does not occur even under high level of positive input spillover.     

Home market effects with endogenous costs of production

In a standard imperfect competition model, we endogenize the costs of production of firms in the increasing returns sector (IRS) via process R&D. We show that firms in the larger region in terms of demand invest more in R&D (i.e.: they are bigger in size and have lower marginal costs) than firms in the smaller region, since the former exploit larger economies of scale in production to pay for the costs of R&D. As a result, when the return on R&D is high, the larger region does not employ disproportionately more labor nor attracts a disproportionately larger share of firms in the IRS in relation to share of demand it hosts, i.e.: negative home market effects (HMEs) in employment and in the number of firms. When this occurs, only partial agglomeration of the IRS in the larger region is sustainable in equilibrium. Even so, the larger region always runs trade surplus in the IRS, i.e.: HME in trade patterns.     

Strategic location choice under dynamic oligopolistic competition and spillovers

This paper investigates firms׳ optimal location choices explicitly accounting for the role of inwards and outwards knowledge spillovers in a dynamic Cournot oligopoly with firms that are heterogeneous in their ability to carry out cost-reducing R&D. Firms can either locate in an industrial cluster or in isolation. Technological spillovers are exchanged between the firms located in the cluster. It is shown that a technological leader has an incentive to locate in isolation only if her advantage exceeds a certain threshold, which is increasing in firms׳ discount rate, in industry dispersion, and in the intensity of knowledge spillovers. Scenarios are identified where although it is optimal for the technological leader to locate in isolation, from a welfare perspective it would be desirable that she locates in the cluster.     

Upstream Mergers,Downstream Competition,and R&D Investments

In this paper, we provide an explanation for why upstream firms merge, highlighting the role of R&D investments and their nature, as well as the role of downstream competition. We show that an upstream merger generates two distinct efficiency gains when downstream competition is not too strong and R&D investments are sufficiently generic: The merger increases R&D investments and decreases wholesale prices. We also show that upstream firms merge unless R&D investments are too specific and downstream competition is neither too weak nor too strong. When the merger materializes, the merger‐generated efficiencies pass on to consumers, and thus, consumers can be better off.     

Product market objectives and the formation of research joint ventures

In this paper we extend the existing literature on research and development (R&D) investments and research joint ventures (RJVs) in two important ways. First, we analyze and compare the case where firms collude in the product market to the benchmark case of competition in the output market. Second, we allow firms to form coalitions endogenously as a separate stage in the game. We develop profit functions that depend on the partition of firms into joint ventures and the nature of product competition between venture partners. Our results illustrate the restrictive nature of some assumptions made in the literature. Typically multiple RJVs of different sizes form in equilibrium. In general, RJVs should not be promoted if they entail product market collusion. Given the information available to policy‐makers, it is unlikely that an R&D policy more refined than analyzing and allowing RJVs on a case‐by‐case basis is feasible. Copyright © 1999 John Wiley & Sons, Ltd.     

Competition with Aftermarket Power When Consumers Are Heterogeneous

We study a model of competitive foremarkets and partly monopolized aftermarkets. We show that high aftermarket power prompts firms to engage in inefficiently aggressive below‐cost pricing in the foremarket. This inefficiency is driven by the presence of consumers with valuations below marginal cost. While for intermediate aftermarket power their presence leads to a competition‐softening effect, for high aftermarket power firms attract increasing numbers of unprofitable consumers by aggressively pricing below cost. For high aftermarket power, firms' equilibrium profits can therefore be decreasing in aftermarket power but are always higher than for low aftermarket power. If firms engage in price discrimination by bundling the foremarket and aftermarket goods or by reducing their aftermarket power, they avoid selling to unprofitable consumers but also reduce the competition‐softening effect. This decreases firms' equilibrium profits but increases consumer and social welfare.     

The R&D location decision of the firm and “creative” regions—a survey

In the flurry of recent concern about and research on high technology firms and economic development, there is relatively little attention paid to the perspective of firms and their location decisions. This paper surveys the literature on the location of R&D facilities and on attempts to establish regions based on innovation and creativity. The locations of R&D facilities are constrained by the labor market for scientists and engineers. The locational needs of the firm revolve around ensuring both that professional labor will be able to be attracted to its R&D locations, and that communication (especially face-to-face communication) will be facilitated. Given these twin concerns, R&D is likely to locate primarily in large urban regions. The corresponding success of regions which hope to become major areas of spin-off and creativity is likewise constrained by the joint preferences of R&D workers, venture capital investors, and high-tech employers.     

Managerial optimism and investment choice

This paper analyzes whether it might be desirable for a firm to hire an overoptimistic manager to commit to a certain R&D strategy. I consider a Cournot model with an ex‐ante R&D stage where firms can invest in cost reduction before product market competition takes place. I show that firms want to hire overoptimistic managers and argue that a manager's type may serve as a substitute for strategic delegation via contracts. Copyright © 2010 John Wiley & Sons, Ltd.     

Endogenous Technological Spillovers: Causes and Consequences

We develop a new approach to endogenizing technological spillovers. We analyze a game in which firms can first invest in cost-reducing R&D, then compete on the human-capital market for their knowledge-bearing employees, and finally enter the product market. If R&D employees change firms, spillovers arise. We show that technological spillovers are most likely when they increase total industry profits. We use this result to show that innovation incentives are usually stronger for endogenous than for exogenous spillovers and that endogenous spillovers may reverse the result that innovation incentives are stronger under quantity competition than under price competition. Finally, we explore the robustness of our results with respect to contractual incompleteness and the number of R&D workers.     

Dynamics in research joint ventures and R&D collaborations

We investigate the short- and long-term effects of different types of R&D collaborations on firms, consumers, and the industry. To that end, we consider a differentiated-product market in which firms compete à la Bertrand and invest in process innovation in order to lower the production cost over time. Investments are stochastic and there can be cartelization or competition strategies among firms at the moment of making the decision on the amount to invest in R&D. Our results show that in equilibrium, the long-run welfare is larger under a research joint venture than under other environments. Discounted present value profits increase with the level of the spillover but there are asymmetries that depend on the firms’ asymmetry on marginal costs.     

Effects of Firm R&D Investment and Environment on Acquisition Likelihood*

abstract R&D investments contribute to the development of firm technology resources, and the possession of such resources often increases a firm's attractiveness as a potential acquisition target. However, the value ascribed to a firm's technology resources by would‐be acquirers may be moderated by its industry's environmental characteristics. Using data from 2886 firms, we find that investments in R&D predict acquisition likelihood and that R&D investments are most strongly associated with acquisition of firms under conditions of high environmental munificence and dynamism. Theoretical and managerial implications are discussed.     

Residual income claimancy,monitoring, and the R&D firm: Theory with application to biotechs

This paper models the assignment of residual income claimancy to an R&D manager and applies the model to biotechnology firms. Residual income claimancy provides incentives for the manager to monitor the R&D process. Since the nature of R&D and of monitoring scientific effort is different, our model predicts stark differences in the residual income claimancy of managers and in other aspects of organization for innovative R&D firms like biotechs. In particular, R&D firms are expected to be more owner‐managed, more expert‐managed, and smaller in size. Cross‐sectional data on biotechnology firms is consistent with these implications. Additionally, longitudinal data indicate that as firms alter their focus on biotech research, their organizational structure changes as expected. Our approach suggests a process of firm and industry evolution related to technological maturity and points to the importance of incentives rather than risk sharing in determining organizational form, similar to the original analysis of franchising. Copyright © 2004 John Wiley & Sons, Ltd.     

Explaining Firms’ Export Behaviour: R&D,Spillovers and the Destination Market*

We examine the importance of a firm's own R&D activity and intra‐sectoral spillovers on the decision to export and the export intensity using firm level panel data for Spain for the period 1990–98. Own R&D activity is found to be an important determinant of export activity. There is little evidence to suggest that Spanish firms benefit from spillovers of the exporting activity of others. However, there is evidence that R&D spillovers exert positive effects on firms’ export ratios. We find a larger marginal impact of R&D spillovers on export intensity of firms exporting to other OECD countries than those exporting to non‐OECD nations.     

Spatial Cournot competition and economic welfare: a note

We investigated welfare implications in location-quantity models in a symmetric linear city. We found that when firms are not agglomerated in equilibrium, increasing the distance between firms raises (reduces) producer surplus and social welfare (consumer surplus). Moreover, central agglomeration is always optimal for consumers among symmetric locations, but not necessarily for producers. Central agglomeration can be inefficient even if it is the unique equilibrium outcome. In short, the firms are more likely to agglomerate or locate closer than what welfare maximizers would dictate, whereas they locate farther apart than what consumer surplus maximizers would recommend.     

Endogenous R&D Networks among Upstream Firms

This paper studies the endogenous formation of R&D networks among upstream firms and the welfare implications thereof. Both under an upstream price setting and an upstream quantity setting, it is shown that the complete R&D network emerges in equilibrium but only if spillovers are sufficiently low. Yet, under a quantity setting, the complete network arises within a larger range of spillovers. In both cases, however, there is a potential conflict between private incentives for R&D collaboration and societal ones. We discuss policy measures that may help to steer firms towards a more socially desirable outcome. Copyright © 2014 John Wiley & Sons, Ltd.     

The negative impact of R&D capitalization: A value relevance approach

Abstract

Accounting for R&D costs is an open issue. SFAS N°2 mandates that all R&D costs must be immediately expensed. IAS 38 requires capitalization of R&D costs if they meet certain criteria. Recent research papers show the value relevance of capitalized R&D. We test the value relevance of R&D reporting in a sample of 197 French firms between 1993 and 2002. The French context provides an interesting field for R&D value relevance studies because both accounting treatments of R&D costs (expensing and capitalization) are allowed. Unlike previous studies, we find that capitalized R&D is negatively associated with stock prices and returns. This negative coefficient on capitalized R&D implies that investors are concerned with and react negatively to capitalization of R&D. We also find that the firms choosing to capitalize (successful) R&D are smaller, more highly leveraged, less profitable and have less growth opportunities. Taking into account these characteristics, our robustness checks confirm that capitalized R&D is not associated with higher prices and is related to lower returns.     

Managerial overconfidence,overinvestment, and R&D spillover

This paper examines whether a firm will select an overoptimistic manager when a cost‐reduction investment has a spillover effect. We consider a Cournot competition model where R&D investment ex ante occurs before the process of product market competition. Our analysis reveals that there exists a unique and symmetric equilibrium for firms to delegate overoptimistic managers. We show that only when the spillover effect is sufficiently high do firms benefit from delegation. Furthermore, the equilibrium confidence level and investment decision first decrease and then increase as the spillover parameter changes. As the initial production cost increases, the equilibrium performance becomes worse.