Dynamic R&D competition under information asymmetry

Abstract

We consider a two-stage dynamic research and development (R&D) game in which two rms compete for a constant prize. It is assumed that the prize is given only to the winner of the competition and in order to get the prize, rms need to complete both stages of the R&D game. We aim to analyze how rms alter their investment rates as the technological states of the competition changes over time. We characterize the Nash equilibrium investment rates using backward induction both for the case with complete and incomplete information. Our observations for the complete information case are in line with the R&D literature. In equilibrium, we observe that the leader rm invests more than the follower rm and sensing the victory is close, it intensi es its R&D investments, while the discouraged follower rm reduces its expenditures. In addition, we observe that the rivalry is more intense when both rms reach the second stage of the game. For the incomplete and asymmetric information case, we again observe an intense rivalry in case both rms complete the rst stage. However, as there is incompleteness and the speed of the rms' research capabilities are not the same in this case, the dynamics of the game change. When both/either of the rms complete the rst stage, it is observed that the rm with the higher R&D capability invests more in innovation than its competitor; independent of it is the leader or the follower.