Pricing Strategies Under Innovation

Many key scientific discoveries are accidental, and applications of scientific research are often in areas far removed from the origin of the discovery, which explains why it is so difficult to model, or even measure, the various benefits of investment in R&D. The task is complicated further if one tries to model the likely spillover and other unintended effects. Firm-level data from innovation surveys1 has revealed that there is a great heterogeneity of innovation patterns across firms, sectors and locations, and that the time required to reap the full benefits of R&D may be quite long. Innovations can take many forms. In the Schumpeterian framework all innovations are dynamic and they alter the static competitive equilibrium to a significant degree. Changing technology, introducing new product lines and expanding markets through scale economies highlight some of the features of innovations. If successful, R&D expenditures generate technological advances that ultimately provide a firm with a competitive advantage.2 Even if not successful, R&D still provide some experience to the firm and enhances its ability to improve its production, its management, and its ability to exploit knowledge, including the exploitation of R&D advances by other firms.