Essays in R&D competition

Abstract

We examine R&D competition between a leader and a laggard in a model where consumers are horizontally differentiated. Each firms are endowed with different ‘ability to research.’ First, it is exogenously given to each firm by some predetermined ‘chance events.’ The technology level is improved gradually and cumulatively through R&D spending of each firms. The Result shows that the laggard with marginally better ‘ability to research’ will not be able to catch up to the leader. Only the laggard with significantly better ‘ability to research’ catches up to the leader and eventually becomes a new market leader. This result is consistent with the observation that a laggard possesses a drastic innovation. The interpretation of the observation is different by paying special attention to many unobserved laggards that fail to survive in spite of having better ‘ability to research.’ Rather than the laggard having more incentive to innovate, this paper concludes that, for a laggard to survive in the market, it must have a significantly better ‘ability to research.’ In addition, we analyze firms\u27 adoption behavior of a new ‘ability to research,’ or a new technology base, when it becomes publicly available. Again, we find that, unless a laggard initially has sufficiently better ability to research so that the value of the future market is significantly high, leader preemptively adopts the new technology