Experimentation in Dynamic R&D Competition
23 Pages Posted: 21 Feb 2019 Last revised: 5 Aug 2019
Date Written: July 2019
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: Suggested Citation