R&D Competition for Standard Setting with Compatibility Externalities
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I consider a R&D contest between two firms which can choose to concentrate their research on one of two research avenues or approaches. In the R&D contest, firms compete in two stages. In the first stage, firms choose which approach they will investigate, after which in the second stage they endogenously select optimal effort level given firms’ choice of approach. There are compatibility externalities if they choose the same approach. However, there is also th89e possibility of simultaneous discovery which may cause harmful results to both firms. The equilibrium avenue choice in each game depends on the magnitude of compatibility externality where it may exhibit too much differentiation or too much duplication. The equilibrium effort choice conditional on duplication in avenue choice is inefficiently high in the equal sharing R&D game, while the equilibrium effort choice is efficient when firms choose different research avenues. The result of the excess differentiation and the efficient investment choice in the Bertrand R&D game suggest that the lump-sum investment subsidy may need to be implemented in the US wireless telecommunication industry to reduce inefficiency involved in excess differentiation without distorting efficient investment choice.
Abstract
I consider a R&D contest between two firms which can choose to concentrate their research on one of two research avenues or approaches. In the R&D contest, firms compete in two stages. In the first stage, firms choose which approach they will investigate, after which in the second stage they endogenously select optimal effort level given firms’ choice of approach. There are compatibility externalities if they choose the same approach. However, there is also th89e possibility of simultaneous discovery which may cause harmful results to both firms. The equilibrium avenue choice in each game depends on the magnitude of compatibility externality where it may exhibit too much differentiation or too much duplication. The equilibrium effort choice conditional on duplication in avenue choice is inefficiently high in the equal sharing R&D game, while the equilibrium effort choice is efficient when firms choose different research avenues. The result of the excess differentiation and the efficient investment choice in the Bertrand R&D game suggest that the lump-sum investment subsidy may need to be implemented in the US wireless telecommunication industry to reduce inefficiency involved in excess differentiation without distorting efficient investment choice.
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