Optimal Sharing Strategies in Dynamic Games of Research and Development
Nisvan Erkal and Deborah Minehart, EAG 07-7, April
2007
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Abstract:
This paper analyses the dynamic aspects of knowledge sharing in R&D
rivalry. In a model where research projects consist of N sequential
stages, our goal is to explore how the innovators' incentives to share
intermediate research outcomes change with progress and with their relative
positions in an R&D race. We consider an uncertain research process,
where progress implies a decrease in the level of uncertainty that a
firm faces. We assume that firms are informed about the progress of
their rivals and make joint sharing decisions either before or after
each success. Changes in the firms' absolute and relative positions
affect their incentives to stay in the race and the expected duration
of monopoly profits if they finish the race first. We show that firms
always prefer to have sharing between their independent research units
if they are allowed to collude in the product market. However, competing
firms may have either decreasing or increasing incentives to share intermediate
research outcomes throughout the race. If the lagging firm never drops
out, the incentives to share always decrease over time as the research
project nears completion. The incentives to share are higher earlier
on because sharing has a smaller impact on each firm's chance of being
a monopolist at the end of the race. If the lagging firm is expected
to drop out, the incentives to share may increase over time. We also
use our framework to analyze the impact of patent policy on the sharing
incentives of firms and show that as patent policy gets stronger, sharing
incentives may decrease or increase depending on whether or not the
lagging firm has increased incentives to drop out.