Competition and Innovation: An Experimental Investigation

Dario Sacco, University of Zurich
Armin Schmutzler, University of Zurich
Donja Darai, University of Zurich

Abstract

The paper analyzes the effects of more intense competi- tion 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 refl‡ects 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.