R&D Allocation : Reliability vs. Customer Cost

The paper considers a monopoly firm with two possible R&D projects, one improving the product itself and the second reducing the customers' costs associated with product failure. The firm must choose one project or the other, and has a fixed budget for R&D expenditures. A condition on parameters is derived which indicates which project should be chosen. Monte Carlo analysis suggests that for the firm's decision-making the most important parameter is a measure of the ambient level of technology. From society's point of view, the most important parameter in determining the effect of the R&D choice on society is the size of the market being served by the firm