The paper formalizes, in a rigorous manner, the concept of information externalities, by modeling R&D activities as the process of searching for a drug to treat a disease, with R&D activities being modeled from the perspective of the theory of optimal search. In conventional models of patent design, only one brand -the brand with the highest quality -is available on the market at any time. Furthermore, demand is completely inelastic: each consumer, regardless of income and regardless of the price of the brand offered on the market, buys exactly one unit of the brand. In this model, which is a dynamic model in continuous time, several differentiated products -the products whose patents are still in force and the products whose patents have expired -are available at any time on the market. Furthermore, the demand for a brand depends on income, its own price, and the prices of the other brands. The analyses of R&D as well as the impact of the cost and the quality of newly discovered drugs on the market are represented under this framework, when the pharmaceutical firms with an active drug discovery program behave strategically in both R&D and in the product market.

The paper extends a theoretical framework for analyzing competition and innovation in presence of horizontal spillovers. Introducing two scenarios, it is shown that when firms behave non-cooperatively in both the R&D and production stages the degree of spillover has a negative relationship with the effective and respective R&D expenditures of each firm as well as the level of social welfare. When firms behave cooperatively in the R&D stage, and non-cooperatively in the production stage the relationship between the R&D expenditure of the joint research lab and the number of firms in the market is negative.

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This article contributes to the established strand of literature on post and postal service by providing a quadratic framework under which national postal markets are analyzed and compared from efficiency, profitability, and quality of service standpoints. Sample countries are grouped into four market models based on two attributes of market structure and ownership. The question of which governance‐operation postal model performs best is then answered. The policy insight offered by this paper expects to guide the advancement of national posts towards an optimal future design that best meets their specific needs and preferences. Copyright © 2016 John Wiley & Sons, Ltd.

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