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Working Papers (2019), ESSEC Business School

Experimentation in Dynamic R&D Competition

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.

DOSIS, A. and MUTHOO, A. (2019). Experimentation in Dynamic R&D Competition. ESSEC Business School.