DP3450 Market and Technical Risk in R&D

Author(s): Heiko A. Gerlach, Thomas Rønde, Konrad O Stahl
Publication Date: July 2002
Keyword(s): Market Risk, R&D Project Choice, Technical Risk
JEL(s): D81, L13, O32
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3450

We endogenize the market risk (at given technical risk) in firms? R&D decisions by introducing stochastic R&D in the Hotelling model. It is shown that if the technical risk is sufficiently high, the market risk remains low even if firms pursue similar projects. This leads firms to focus on the most valuable market segment. We then also endogenize technical risk by allowing firms to choose their R&D technology. In equilibrium, firms either pursue similar (different) R&D projects with risky (safe) technologies or they choose the same project but apply different R&D technologies. We show that R&D spillovers lead to more differentiated R&D efforts and patent protection to less. Project coordination within a RJV implies more differentiation, and may, or may not be welfare-improving.