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Competition for the development of a new product : theoretical and experimental investigation

Authors Rapoport, Amnon
Amaldoss, Wilfred
Issue Date 1997-09
Summary The competition between two firms involved in developing a new product is modeled as a two-person nonzerosum game in strategic form in which each firm invests part of its R&D budget in the development of the product. The firm investing the highest amount wins the competition and receives a commonly known, exogenously determined reward. Investments of both firms are assumed to be project specific and nonrecoverable, implying an unconditional commitment of resources. The case of symmetric firms with the same R&D budget and that of asymmetric firms with different R&D budgets are examined both theoretically and experimentally. The equilibrium solutions for both cases call for mixed strategies resulting in expected payoffs that are independent of the size of the reward, equal to the minmax payoffs, and Pareto-deficient. The experimental results reject minmax play, show weak support for the equilibrium solutions on the aggregate but no individual level, and provide evidence for iterative deletion of strongly dominated strategies.
Language English
Format Working paper
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