Experimentation in Dynamic R&D Competition

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 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.
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Submitted on : Wednesday, April 17, 2019 - 2:02:52 PM
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Anastasios Dosis, Abhinay Muthoo. Experimentation in Dynamic R&D Competition. 2019. ⟨hal-02102518⟩

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