Uncertain innovation with uncertain product durability

Abstract

This paper adds to two strands of the economics literature, the literature on product durability and on technical change, in a small way by introducing the possibility that an uncertain invention may be exogenously durable. Durability makes otherwise fully appropriable innovation porous. We consider a duopoly where firms maximize the present discounted rewards from innovation that might turn out to be a durable good or a non-durable good. Comparative-static results show that greater appropriability of rewards from the durable good innovation induces the firm to increase its profit-maximizing research spending. The effect of a change in the probability of the durable innovation is shown to depend on the degree of appropriability. The consideration of the effect of changes in the probability of durable innovation is unique to the literature. The effects of change in R&D competition are ambiguous and in line with earlier findings. Two special cases are considered and policy implications discussed.