Reputation, utility and technological innovation strategies

In order to study the optimal R&D strategies of a firm in a dynamic environment, this paper introduces a reputation model on two-stage R&D decision-making by employing signaling games based on Schumpeter's process of creative destruction. There are two players in the game. One is a sender with private information on its own synthesized capability of type H (high) and L (low), and the other is a receiver without private information. The reputation model studies the type L sender on whether there is an incentive to build reputation in first phase. We solve the game model without considering reputation by applying adverse induction method and compare the results with that of using reputation. We show that the optimal signal of the type L sender is larger in phase two if it builds up reputation in phase one. The utility of the type L sender is less in phase one if it builds up reputation in phase one. However, it will receive higher utility in phase two. Our results can be applied to setting marketing and sales strategies.