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Competition and Innovation: An Experimental Investigation


Darai, Donja; Sacco, Dario; Schmutzler, Armin (2007). Competition and Innovation: An Experimental Investigation. Working paper series / Socioeconomic Institute No. 608, University of Zurich.

Abstract

The paper analyzes the effects of more intense competition on firms'incentives to invest in process innovations. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. As predicted by theory, an increase in the number of firms from two to four reduces investments. However, a positive effect is observed for a switch from Cournot to Bertrand, even though theory predicts a negative effect in the four-player case. This result reflects overinvestment in the Bertrand case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented.

Abstract

The paper analyzes the effects of more intense competition on firms'incentives to invest in process innovations. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. As predicted by theory, an increase in the number of firms from two to four reduces investments. However, a positive effect is observed for a switch from Cournot to Bertrand, even though theory predicts a negative effect in the four-player case. This result reflects overinvestment in the Bertrand case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:C92, L13, O31
Language:English
Date:April 2007
Deposited On:29 Nov 2011 22:47
Last Modified:21 Nov 2017 15:37
Series Name:Working paper series / Socioeconomic Institute
Official URL:http://www.econ.uzh.ch/wp.html

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