Dynamic Product Reliability Management For a Firm with a Complacent Competitor vs. a Lockstep Competitor

Abstract

Consider a dynamic duopoly model where R&D spending is used to increasethe reliability of a firm's product under two competitive scenarios: the home firmcompetes with a “complacent” foreign firm that does no R&D whatsoever or with a“lockstep” foreign firm that improves its product at exactly the same rate as the homefirm. The paper suggests that a firm with a complacent competitor produces a morereliable product, does more R&D, and earns more profit than a firm with a lockstepcompetitor. On the other hand, sufficiently less R&D spending is required that profits perR&D dollar are greater in the lockstep scenario. Extensions of the basic model includechanges in the planning period, introducing trade costs, and considering intermediatecompetitive scenarios. (D92, O3)