Cobb–Douglas R&D production function, appropriability and opportunity: effects on R&D, technological progress and knowledge sharing

ABSTRACT

We consider a Cobb–Douglas production function with two firm-specific R&D resource inputs and specify the conditions under which higher knowledge spillovers cause higher technological progress in the industry. We then consider the exponential R&D production function and establish sufficient conditions for per-firm own R&D expenditures to be an increasing function of knowledge spillovers and technological opportunities. Knowledge spillovers and technological possibilities encourage R&D spending if firms’ decisions on R&D investments are strategic complements. We consider two identical firms that, prior to competition in the product market, first decide whether to reveal their R&D efforts to the other firm and second conduct cost-reducing or demand-enhancing R&D and examine the conditions under which full revelation of R&D efforts to rivals yields higher profits. Trigger strategies which require non-cooperative firms to share their R&D inputs will ensure the efficient sharing of R&D efforts. This model has new policy implications about the effects of knowledge spillovers and complementarity in R&D on the incentives to innovate and promote welfare. We present an intellectual property policy that challenges the traditional model of intellectual property as exclusive ownership rights.

KEYWORDS:

• Complementarity
• Cobb–Douglas
• O-ring
• spillovers
• R&D
• pharmaceutical and biotechnology industries

JEL CLASSIFICATION:

• D43
• L13
• L23
• O30

Disclosure statement

No potential conflict of interest was reported by the author(s).