Competition and Innovation: An Experimental Investigation

Posted by D. Daniel Sokol

Armin Schmutzler, University of Zurich - Socioeconomic Institute (SOI) provides his thoughts on Competition and Innovation: An Experimental Investigation.

ABSTRACT: The paper analyzes the effects of more intense competition on firms' incentives to invest in process innovations. We carry out experiments based on 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.