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

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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File URL: http://www.wiwi.tu-clausthal.de/fileadmin/Volkswirtschaftslehre/RePEc/pdf/InnovationCompetitionExperiment_030812.pdf
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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
Date of revision:
Handle: RePEc:tuc:tucewp:0008
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  1. Harris, Christopher & Vickers, John, 1987. "Racing with Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 1-21, January.
  2. 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.
  3. 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.
  4. repec:dgr:kubcen:200399 is not listed on IDEAS
  5. Morton I. Kamien & Yair Tauman, 1984. "Fees Versus Royalties and the Private Value of a Patent," Discussion Papers 583, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Zizzo, D.J., 2001. "Racing with Uncertainty: A Patent Race Experiment," Economics Series Working Papers 9968, University of Oxford, Department of Economics.
  7. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August.
  8. Reinganum, Jennifer R., . "Innovation and Industry Evolution," Working Papers 426, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. 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.
  10. 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.
  11. 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.
  12. Yves Breitmoser & Jonathan Tan & Daniel Zizzo, 2010. "Understanding perpetual R&D races," Economic Theory, Springer, vol. 44(3), pages 445-467, September.
  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. 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.
  16. 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.
  17. 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.
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