R & D: Allocation: Reliability Vs. Customer Cost

Abstract

The paper considers a monopoly firm with two possible R & D projects, one improving the product's reliability and the second reducing the customers' costs associated with product failure. The firm must choose one project or the other, and has a fixed budget for R & D expenditures. A condition on parameters is derived which indicates which project should be chosen. Monte Carlo analysis suggests that for the firm's decision-making the most important parameter is a measure of the ambient level of technology. From society's point of view, the most important parameter in determining the effect of the R & D choice on society is the size of the market being served by the firm.