Asymmetric information and R & D competition

Abstract

This paper analyses R&D competition among firms with incomplete information. In a two-stage stochastic R&D game, the first mover possesses private information regarding its R&D progress. The rival can only observe its R&D investments, but not the actual R&D position. R&D investment thus carries both investment and signalling effects. Both complete information and signalling equilibria are possible in the second period. For some parameter ranges, the equilibrium regime is endogenous and depends on the firms position. The possibility of the signalling equilibrium may induce under-investment in the first period, which is on the contrary to the conclusion of entry deterrence literature