SIMULTANEOUS SIGNALING THROUGH INVESTMENT IN AN RESEARCH-AND-DEVELOPMENT GAME WITH PRIVATE INFORMATION

We analyze an R&D game of two-sided incomplete information in which firms can invest in cost reducing technology before engaging in Cournot competition. Investment is observable, but R&D outcomes are not. We focus on partial pooling equilibria in which high cost firms mimic the strategy of low cost firms, resulting in under investment in equilibrium. These equilibria generally involve mixed strategies with the novel feature that players are not indifferent among their mixed strategies due to the beliefs and subsequent actions they induce. Further results suggest that firms may be willing to pay to keep their R& D outcomes concealed. © 1992.