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Cost Signals under Uncertain R&D Outcomes
Author(s) -
Tung Chris Y.,
Wang ChunChieh
Publication year - 2014
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.12029
Subject(s) - production (economics) , profitability index , competitor analysis , competition (biology) , signalling , economics , information asymmetry , homogeneous , microeconomics , production cost , industrial organization , business , finance , mathematics , ecology , management , combinatorics , biology , mechanical engineering , engineering
When it is difficult for firms to differentiate their products from those of their competitors, research and development ( R & D ) spending on process innovation to lower the cost of production is crucial for profitability. However, the information asymmetry in production costs that results from innovation reduces the efficiency of all firms in a market for a homogeneous good. We employ a signalling game to discuss the feasibility of utilising R & D spending and output levels as cost signals in an environment of quantity competition. The results show that a firm does not spend its money on R & D solely to signal the type of cost. Rather, R & D spending may be chosen as a cost signal over the output level only if expenditures on R & D can lead to a sufficiently high probability of reducing production costs.