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Quasi-Rational R&D Behavior in an Environment with Fundamental Uncertainty

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Abstract

The objective of our paper is to study R&D investments and pricing behavior in an environment with fundamental uncertainty. We designed a multi-period experiment in which each period consisted of two stages, an R&D phase and a pricing stage. Participants in the experiment had almost no information about the underlying functions, parameters, and probabilities. Subjects’ behavior in the fundamentally uncertain environment of our experiment may best be characterized as some kind of procedural rationality which we call quasi-rationality. Pricing decisions are particularly close to equilibrium values. Although we do find some hints of the existence of behavioral effects in R&D decisions, only reinforcement effects are significant across both treatments and different model specifications. The introduction of patents has only a minor impact on R&D behavior. Overall, subjects learn to adapt remarkably well to a rather complex and fundamentally uncertain environment.

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Paper provided by Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal) in its series TUC Working Papers in Economics with number 0008.

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Length: 22 pages
Date of creation: 2012
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Handle: RePEc:tuc:tucewp:0008

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Keywords: bounded rationality; duopoly; innovation; experiment; R&D competition;

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  1. Yves Breitmoser & Jonathan H.W. Tan & Daniel John Zizzo, 2008. "Understanding Perpetual R&D Races," Discussion Papers 2008-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  2. Zizzo, Daniel John, 2002. "Racing with uncertainty: a patent race experiment," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 877-902, June.
  3. Harris, Christopher & Vickers, John, 1987. "Racing with Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 1-21, January.
  4. Uwe Cantner & Werner Güth & Andreas Nicklisch & Torsten Weiland, 2007. "Competition in product design: An experiment exploring innovation behavior," Jena Economic Research Papers 2007-014, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  5. Reinganum, Jennifer F, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 81-99, February.
  6. Suetens, Sigrid, 2008. "Does R&D cooperation facilitate price collusion? An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 822-836, June.
  7. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  8. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August.
  9. Isaac, R. Mark & Reynolds, Stanley S., 1992. "Schumpeterian competition in experimental markets," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 59-100, January.
  10. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
  11. Isaac, R Mark & Reynolds, Stanley S, 1988. "Appropriability and Market Structure in a Stochastic Invention Model," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 647-71, November.
  12. Katz, Michael L & Shapiro, Carl, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 567-89, August.
  13. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  14. Heiner, Ronald A, 1983. "The Origin of Predictable Behavior," American Economic Review, American Economic Association, vol. 73(4), pages 560-95, September.
  15. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
  16. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  17. Kamien, Morton I & Tauman, Yair, 1986. "Fees versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 471-91, August.
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