Innovation Races with Reward Sharing

The focus in this contribution is on innovative technological races with uncertainty as to who will win a fixed market prize. One firm is the first mover and commits to innovative efforts such as investments in research and development before the followers choose their efforts to win. Perhaps the winner can take the whole prize, but in many cases a sharing of the new market will occur. When market protection is not perfect the winner will have to share the prize with the other players. The analysis is able to clarify the impact of such sharing on the efforts and profitability of the racing participants. It is possible that the first mover will take the number of followers as given. In such a setting with winner takes all, a follower will tend to invest more than the leader (Reinganum, 1985). But this may be reversed with market sharing, in case the pioneer realizes no or low profits from current (older) technologies. The first mover will invest more if he can fully protect his market, while the followers cannot. Sometimes the leader will realize that his efforts may influence the number of followers. With winner takes all it is then the first mover that will provide the largest efforts (Etro, 2004). But market sharing may again turn this around, in case a winning first mover has to share while a winning late mover can keep the whole prize. To understand and to determine innovative efforts in technological races one therefore has to combine information on the sequence of efforts and on the possibilities of market protection.