Introduction

• How do firms choose the intersity of their research activity?
• How do R&D activites depend on the nature of the innovation?
• What role do technological races play in this context?
• What are sleeping patents?

R&S and Innovation

Stages of R&D

• Basic Research

  • Development of scientific knowledge that is applicable to wide range of potential uses
  • E.g. Research on radio waves

• Applied Reserach

  • Application of scientific knowledge to the solution of a specific problem
  • Development of a new product or process
  • E.g. Development of mobile phone prototype

• Product Development

  • Identification of the relevant consumers
  • Tailoring of the product / process to the needs of these consumers

Difference

• Basic Research

  • Out comes difficult to protect
  • Subject to knowledge spillovers between firms(publications, personnel contacts)
  • Problem : Prisoner's dilemma(如果只有一方投入，同樣所有人都可以收益，於是沒人願意投入）
  • Solve : Mainly done by universities, public laboratories or newtork of firms

• Applied Research & Product Development

  • Can often be protected by patents or copyright possble to stop others from making use of it
  • If two firms develop similar products, whoever comes first wins
  • Ofen leads to patent races

Types of innovation

Product Innovation VS Process Innovation

• Product Innovation

  • Improvement of an existing product
  • Increase in willingness to pay of existing / potential buyers

• Process Innovation

  • Novel way of producing an existing product
  • In most cases reduction of production costs

• E.g. Car Tires

  • Product : New mixture of rubber that keeps the car stable at high speeds
  • Process : New way of curing the tire which decreases production cost s by 25%

Drastic VS Increemental Innovation

• Drastic Innovation

  • The innovator can behave as a monopolist in the market (despite substitute products)

• Incremental Innovaton

  • The innovator can increase profits but its strategy is still restricted by other non-innovating firms

• E.g Electric Car

  • Drastic : Development of electric car
  • Incremental : Improvement of battery unit that increases range of electric car

Incentives to Innovate

Competitive Market

• The value of an innovation to a firm be calculated
  • The value of an innovation equals the firm's profits with innovation minus the firm's profits without innovation

Monopolist

• Replacement effect

  • for a given market structure, a monopolist has less of an incentive to innovate because he has a higher level of pre-innovation profits

• In a competitive market the value of innovation is higher than for a monopolist

Monopolist with Threat of Entry

• Efficiency effect
  • Under the threat of entry, a monopolist has highter incentives to innovate than a potential entrant into the market

Monopolist face Trade-off

• Replacement Effect

  • Less innovation by monopolist

• Efficiency Effect

  • More innovation by monopolist

• Factor

  • Probability of entry

Innovation & Competition

Innovation under Competition

• Trade-Off for R&D

  • Chance of innovation with promising returns
  • Risk of losing R&D investments(If no success at all or if other company is faster)

• 設研發的成功率為p，研發成本C，獨佔研發成功的收益為X，兩方同時研發成功的收益為Y，（為了簡單，雙方同時使用以上假設）有：

  • 不研發時收益為0
  • 一方決定研發時收益為Xp - C
  • 兩方決定研發時的收益為Xp(1 - p) + Ypp - C

通過引入p，可以建立收益矩陣並有效分析決策隨p變化的情況

• Comparison of Success Rates（對於上式，關注p可以有以下規律）
  • Low success rate -> No R&D at all
  • Medium success rate -> R&D by one firm and pre-emption
  • Heigh success rate -> R&D by both firms

低成功率的研發不會有企業投入

中等成功率的研發會導致：1）一個企業搶先佔領市場。2）兩個不佔優的納什均衡點的情況（單個研發收益高，但是多個研發收益下降（Y遠小於X））

高成功率的研發會導致多個企業同時投入並降低整個市場的總體收益（Y遠小於X）

Sleeping Patents

• Phenomenon

  • Companies often apply for relatively minor patents
  • The yhave no intention of ever commercialising these

• Idea

  • Preventing ocmpetitors from inventing a close rival to own product
  • Maintaining monopoly position