A simple model of RD: An extension of the Dorfman-Steiner theorem

Abstract

This paper extends the seminal Dorfman- Steiner (American Economic Review, 44, 826- 36, 1954) theorem by putting underlying structures on the determination of market share and on the production of quality or technology. The model developed in this paper yields a demand- pull, technology- push theory of R& D, where the profit- maximizing R& D intensity (i. e., the ratio of R& D expenditure to sales) is determined jointly by consumer characteristics, represented by the elasticities of consumer value with respect to price and quality, and firm- specific technological competence or simply R& D productivity, measured as the R& D elasticity of quality or technological output.