Technology,

R&D,
and
Efficiency
Technological Advance Continuum
• Invention: the first discovery of a
product or process through use of
imagination, ingenious thinking, and
experimentation and the first proof
that it will work.
Technological Advance Continuum
• Invention:
• Innovation: the first commercially
successful introduction of a new
product or the use of a new method
of production; i.e., innovation may
either be product innovation or
process innovation.
Technological Advance Continuum
• Invention:
• Innovation:
• Diffusion: The spread of innovation
through its widespread imitation.
 Technological Advance Continuum
• Technological Advance occurs over the long-run
through research & development.
• R&D is optimized through the weighing of
interest rate cost of funds (immediate and
tangible marginal costs) against an estimation of
future rate of return (uncertain marginal
benefit).
• Sources of funds: bank loans, bonds, retained
earnings, venture capital, personal savings.
 Technological Advance Continuum
• Technological Advance occurs over the long-run
through research & development.
• R&D is optimized through the weighing of
Graphically...
interest rate cost of funds (immediate and
tangible marginal costs) against an estimation of
future rate of return (uncertain marginal
benefit).
• Sources of funds: bank loans, bonds, retained
earnings, venture capital, personal savings.
 Optimal R&D Determination
Interest-Rate Cost of Funds
20
8%
Interest Rate Percent - i

16

12

8 i

0
20 40 60 80 100
R&D Expenditures
(millions of dollars)
 Optimal R&D Determination
Interest-Rate Cost of Funds
20
8%
Interest Rate Percent - i

16 Expected-Rate of Return Sch

R&D
Exp. Ret. %
12 $10 18
20 16
8 i
30 14
40 12
4 r
50 10
0 60 8
20 40 60 80 100 70 6
R&D Expenditures
(millions of dollars) 80 4
 Optimal R&D Determination
Interest-Rate Cost of Funds
20
8%
Interest Rate Percent - i

16 Expected-Rate of Return Sch

R&D
Exp. Ret. %
12 $10 18
20 16
8 i
30 14
40 12
4 r 50 10
0 60 8
20 40 60 80 100 70 6
R&D Expenditures
(millions of dollars) 80 4
 Innovation & Increased Profit
• Increased revenue via product
innovation: consumers buy new products
only when they can enjoy an increase in
total utility.
 Innovation & Increased Profit
• Increased revenue via product
innovation: consumers buy new products
only when they can enjoy an increase in
total utility.
• Reduced cost through process innovation
 Innovation & Increased Profit
• Increased revenue via product
innovation: consumers buy new products
only when they can enjoy an increase in
total utility.
• Reduced cost through process innovation
• Imitation problem
 Innovation & Increased Profit
• Benefits of Being First
– Patents
– Copyrights & Trademarks
– Brand-Name Recognition
– Trade Secrets - Learning
– Time Lags
– Profitable Buyouts
 Role of Market Structure

– Pure Competition
– Monopolistic Competition
– Oligopoly
– Pure Monopoly
 Inverted-U Theory
R&D Expenditures
Percent of Sales

0 25 50 75 100
Concentration Ratio (Percent)
 Inverted-U Theory

E COMPETITION LESS COMP

R&D Expenditures
Percent of Sales

0 25 50 75 100
Concentration Ratio (Percent)
 Inverted-U Theory

E COMPETITION LESS COMP

R&D Expenditures
Percent of Sales

0 25 50 75 100
Concentration Ratio (Percent)
Technological Advance &
Efficiency
 Technological Advance &
Efficiency
• Productive Efficiency: improves with
process innovation (reduces cost)
 Technological Advance &
Efficiency
• Productive Efficiency: improves with
process innovation (reduces cost)
• Allocative Efficiency: enhanced with
product innovation (increases consumer
utility)
 Product A: Product B: Product B:
Price = $1 Price = $2 Price = $1
Unit of
product MUA MUA/PA MUB MUB/PB MUB/PB

1st 10 10 24 12 24
2nd 8 8 20 10 20
3rd 7 7 18 9 18
4th 6 6 16 8 16
5th 5 5 12 6 12
6th 4 4 6 3 6
7th 3 3 4 2 4

$ 10 income