Experimentation in Dynamic R&D Competition

23 Pages Posted: 21 Feb 2019 Last revised: 5 Aug 2019

See all articles by Anastasios Dosis

Anastasios Dosis

ESSEC Business School; University of Cergy-Pontoise - THEMA

Abhinay Muthoo

University of Warwick - Department of Economics

Date Written: July 2019

Abstract

This paper studies a two-stage 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 cutoff belief coincides with the socially efficient cutoff belief, although firms might experiment excessively in equilibrium; for relatively 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.

Keywords: Experimentation; Learning, Dynamic R&D Competition; Inefficiency

JEL Classification: C73; D83; O31; O32

Suggested Citation

Dosis, Anastasios and Muthoo, Abhinay, Experimentation in Dynamic R&D Competition (July 2019). Available at SSRN: https://ssrn.com/abstract=3330816 or http://dx.doi.org/10.2139/ssrn.3330816

Anastasios Dosis (Contact Author)

ESSEC Business School

3 Avenue Bernard Hirsch
B.P 50105
Cergy - Pontoise Cedex, NA 95021
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

Abhinay Muthoo

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

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