Market and Technical Risk in R&D

We endogenize the market risk (at given technical risk) in firms’ R&D decisions by introducing stochastic R&D in the Hotelling model. It is shown that if the technical risk is sufficiently high, the market risk remains low even if firms pursue similar projects. This leads firms to focus on the most valuable market segment. We then also endogenize technical risk by allowing firms to choose their R&D technology. In equilibrium, firms either pursue similar (different) R&D projects with risky (safe) technologies or they choose the same project but apply different R&D technologies. We show that R&D spillovers lead to more differentiated R&D efforts and patent protection to less. Project coordination within a RJV implies more differentiation, and may, or may not be welfare-improving