Production experiences and market structure in R&D competition

In the R&D race the incumbent enjoys an advantage of learning from production experiences, but this important feature has not been incorporated into existing studies. Assuming that the technological knowledge is accumulated not only by R&D expenditures but also by production experiences, we study the properties of optimal investment strategies in a model with an incumbent and many identical challengers. After proving the existence of a unique Nash equilibrium in the R&D race, we demonstrate analytically that the likelihood of persistent leadership increases with production experiences of the incumbent but decreases with the number of challengers. Numerical analyses also establish that (i) the challengers always invest more than the incumbent and the difference increases with production experiences, the flow of monopoly profits and the number of challengers; and (ii) the likelihood of persistent leadership increases with the value of being the winner and the value of being a loser but decreases with expected waiting time of R&D innovation and the flow of monopoly profits. However, destructive innovations may still occur even when production experiences are allowed to play an important role in the R&D competition. (c) 2005 Published by Elsevier B.V.