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The problem with that example (and that whole line of thinking) is that the $1 billion they put into research was a gamble in the first place and didn't actuall

The problem with that example (and that whole line of thinking) is that the $1 billion they put into research was a gamble in the first place and didn't actually give them any pricing power because it has nothing to do with the demand for that product. Why should we care? Knowing the current market it's actually way more likely that that the product flops completely and the $1 billion goes completely to waste. But now because of patents they get to stay in business to repeat this mistake again because they can just extort licensing fees from other companies who want to actually improve this idea and make it marketable. It just doesn't make any sense from any perspective. Demand should be what drives R&D, not profit. When profit drives research that's all you'll get: companies with no products hoarding research (i.e. patents) and just sitting around suing people.

rayiner 13y ago
R&D does give companies pricing power. If you come up with a 3 GHz 1W chip in a market of 2 GHz 3W chips, suddenly your product is non-fungible with all the other competitors, and as a result you can price the product above its marginal cost. Whether it's worthwhile to spend $1 billion doing that depends on how long you can last before all your competitors come up with 3 GHz 1W chips. Because once that happens, competitive pressures will force prices downwards to the marginal costs of production. If that time isn't long enough for you to recoup that R&D, then it's a losing play to be the one that puts in that work. The winning play is to be the company that copies that technology and maybe tweaks it the last 1%. As a practical matter, profit has to drive R&D, because there is no money for R&D without profits. And in perfectly competitive markets, there are no profits and no R&D. The only way to make real money is to produce products that are non-fungible, and differentiable. You can do that in only a few ways: R&D, network effects, marketing, or branding. If you look at the profitable companies in the tech industry, their profits come from one or the other. If you look at the companies that produce fungible products for highly competitive markets (Acer, Lenovo, etc), you see that they their profits are marginal and so is their level of innovation.

rayiner 13y ago

R&D does give companies pricing power. If you come up with a 3 GHz 1W chip in a market of 2 GHz 3W chips, suddenly your product is non-fungible with all the other competitors, and as a result you can price the product above its marginal cost. Whether it's worthwhile to spend $1 billion doing that depends on how long you can last before all your competitors come up with 3 GHz 1W chips. Because once that happens, competitive pressures will force prices downwards to the marginal costs of production. If that time isn't long enough for you to recoup that R&D, then it's a losing play to be the one that puts in that work. The winning play is to be the company that copies that technology and maybe tweaks it the last 1%. As a practical matter, profit has to drive R&D, because there is no money for R&D without profits. And in perfectly competitive markets, there are no profits and no R&D. The only way to make real money is to produce products that are non-fungible, and differentiable. You can do that in only a few ways: R&D, network effects, marketing, or branding. If you look at the profitable companies in the tech industry, their profits come from one or the other. If you look at the companies that produce fungible products for highly competitive markets (Acer, Lenovo, etc), you see that they their profits are marginal and so is their level of innovation.