Dynamic Product Reliability Management for a Firm with a Complacent Competitor vs. a Lockstep Competitor

Consider a dynamic duopoly model where R&D spending is used to increase the reliability of a firm's product under two competitive scenarios: the home firm competes with a "complacent" foreign firm that does no R&D whatsoever or with a "lockstep" foreign firm that improves its product at exactly the same rate as the home firm. The paper suggests that a firm with a complacent competitor produces a more reliable product, does more R&D, and earns more profit than a firm with a lockstep competitor. On the other hand, sufficiently less R&D spending is required that profits per R&D dollar are greater in the lockstep scenario. Extensions of the basic model include changes in the planning period, introducing trade costs, and considering intermediate competitive scenarios.