Abstract

This paper examines a durable-good monopolist's R&D decision in new product development. We show that the monopolist without commitment faces a time inconsistency problem concerning the choice of research technology, and as a result ends up choosing a safer research project and investing less than the commitment solution. This implies more frequent but smaller quality improvements in durable-good markets. It is shown that the time inconsistency problem in fact serves to increase social welfare by inducing the firm to choose a socially optimal research project.

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