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R & D Spending and product pricing
Author(s) -
Erickson Gary M.
Publication year - 1990
Publication title -
optimal control applications and methods
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 44
eISSN - 1099-1514
pISSN - 0143-2087
DOI - 10.1002/oca.4660110308
Subject(s) - economics , monotonic function , econometrics , unit (ring theory) , state variable , product (mathematics) , microeconomics , variable (mathematics) , mathematics , thermodynamics , mathematical analysis , physics , geometry , mathematics education
Abstract An optimal control model is developed that combines cost reduction through R & D with pricing. Price and R & D spending level are control variables and unit cost is a state variable. Analysis of the model reveals that if a firm has a positive discount rate, optimal R & D spending on cost reduction may grow to a peak before eventually declining. If the firm has a zero discount rate, optimal R & D spending declines monotonically across time. Optimal price declines monotonically in either case, in a direct relationship with unit cost.