Process RDin Monopoly under Demand Uncertainty

I investigate RDefforts for process innovation in a monopoly with uncertain demand. Two different models are proposed, where either (i) the reservation price is affected by an additive shock and the marginal production cost is increasing, or (ii) a multiplicative shock on the slope of demand combines with a flat marginal production cost. In either case, price-setting behaviour generates a larger RDinvestment than quantity-setting behaviour. An Arrovian interpretation of the first result and a Schumpeterian interpretation of the second are proposed. I thank the Editor, Thijs ten Raa, for precious suggestions. I am also grateful to Sougata Poddar, Gianpaolo Rossini and Dan Sasaki for helpful comments and discussion. The usual disclaimer applies. Citation: Lambertini, Luca, (2006) "Process RDin Monopoly under Demand Uncertainty." Economics Bulletin, Vol. 15, No. 14 pp. 1-9 Submitted: December 22, 2004. Accepted: December 27, 2006. URL: http://economicsbulletin.vanderbilt.edu/2006/volume15/EB-04O30007A.pdf Process R&D in Monopoly under Demand Uncertainty∗ Luca Lambertini Dipartimento di Scienze Economiche Università degli Studi di Bologna Strada Maggiore 45, 40125 Bologna, Italy phone 39-051-2092600, fax 39-051-2092664 [email protected] ENCORE, Faculty of Economics University of Amsterdam Roetersstraat 11, 1018 WB Amsterdam