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Abstract

The paper considers an industry where competition is characterized as a two-stage game between the two firms in which the product reliabilities are determined before the (Coumot) quantities. Reliability is determined by R&D expenditure. The focus is on how competitive conditions in terms of manufacturing costs affect tile firms' decision about optimal reliability. The main result of the paper is that the firm with lower manufacturing cost produces a more reliable product. However a reduction in a given. firm 's manufacturing cost only causes it to produce a more reliable product when the difference in costs between firms is low. Comparative static exercises suggest that reliability generally increases when customers have a higher reservation price for the product and a lower customer cost of product failure.

Volume

8

Issue

1

First Page

84

Last Page

89

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