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Experimentation in Dynamic R&D Competition

Author

Listed:
  • Dosis, Anastasios

    (ESSEC Business School and THEMA)

  • Muthoo, Abhinay

    (University of Warwick)

Abstract

We study a two-stage, winner-takes-all, R&D race, in which, at the outset, firms are uncertain regarding the viability of the project. Learning through experimentation introduces a bilateral (dynamic) feedback mechanism. For relatively low-value products,the equilibrium stopping time coincides with the socially efficient stopping time although firms might experiment excessively inequilibrium; forrelatively high-value products, firms might reduce experimentation and stop rather prematurely due to the fundamental free-riding effect. Perhaps surprisingly, a decrease in the value of the product can spur experimentation.

Suggested Citation

  • Dosis, Anastasios & Muthoo, Abhinay, 2019. "Experimentation in Dynamic R&D Competition," The Warwick Economics Research Paper Series (TWERPS) 1214, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:1214
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    References listed on IDEAS

    as
    1. Heidhues, Paul & Rady, Sven & Strack, Philipp, 2015. "Strategic experimentation with private payoffs," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 531-551.
    2. Rieck, Thomas, 2010. "Information Disclosure in Innovation Contests," Bonn Econ Discussion Papers 16/2010, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
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    Cited by:

    1. Gorno, Leandro & Iachan, Felipe S., 2020. "Competitive real options under private information," Journal of Economic Theory, Elsevier, vol. 185(C).

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    More about this item

    Keywords

    Experimentation ; learning ; dynamic R&D competition ; inefficiency;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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