I examine the effects of investment in capacity and cost-reducing R&D on a duopoly in which firms compete via product prices, capacity, and productivity by incorporating stochastic cost-reducing R&D investment into the framework developed in Besanko and Doraszelski (2004). The inclusion of stochastic cost-reducing R&D investment is shown to affect the industry concentration most significantly when the probability of R&D success is neither very high nor very low. In this case, there exists a strong positive relationship between a firm’s equilibrium capacity and productivity and the industry is probabilistically monopolistic. At the lower end of this range, a cost advantage is more important for achieving industry leadership whereas for higher probabilities of R&D success, a capacity lead is more important.

“A Stochastic Life Cycle Model of Academic Research and Patent Licensing” (with Richard Jensen) (Completed)

We extend the literature on life cycle behavior of faculty researchers by assuming two knowledge stocks, scientific (free to all) and patentable (appropriable). Faculty derive utility from research effort, leisure, prestige in knowledge accumulation, and income. Faculty with a strong preference for one type of research tend to devote more time to it, but if the knowledge stock associated with it grows fast enough, then they reallocate time from more to less preferred research later in the life cycle. Both knowledge stocks matter to utility, so if one grows sufficiently larger, the marginal utility from an increase in the other becomes greater, implying a time reallocation. An increase in license income, such as from the Bayh-Dole Act, increases in the time spent in applied research, but faculty do this by decreasing their leisure time first, then their time spent in basic research. Thus, the scientific knowledge stock is not always smaller as a result of this type of legislation. The primary effect of spillovers from applied to basic research (the Pasteur's Quadrant effect) is to increase the scientific knowledge stock, but faculty effort in basic research need not decrease, and may increase.

“From Academia to Entrepreneurship” (with Richard Jensen and Marie Thursby) (In progress)

In light of the Bayh-Dole Act (1980), my research examines the trade-offs a university researcher faces when deciding whether to remain in academia or to found a start-up firm. Given the extensive involvement of a researcher in the development and implementation of his innovation, I am investigating a professor’s choices between basic and applied research when there exists a possible career switch from professorship to entrepreneurship.

“Absorptive Capacity in a Dynamic Firm Competition” (In progress)

This model studies the effect of absorptive capacity in an environment identical to that of the “Endogenous Capacity and Productivity in Duopolies” paper. Absorptive capacity refers to the ability of a firm to recognize the value of new, external information, assimilate it, and apply to commercial ends (Cohen & Levinthal, 1990). Since the effectiveness of R&D success is crucial to whether a smaller firm survives in the market, the inclusion of spillovers among knowledge stocks is studied. There are two cases of spillovers that I would like to consider. First, spillovers are exogenous, that is a firm is not required to have any in-house knowledge in order to learn and imitate a new technology. Second, spillovers are endogenous, meaning that a firm’s ability to absorb and imitate a new technology depends on the firm’s own knowledge.

Huyen T. Pham • Notre Dame, IN • 46556 • hpham5@nd.edu