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Competition and innovation: an experimental investigation

Published online by Cambridge University Press:  14 March 2025

Donja Darai ,
Dario Sacco  and
Armin Schmutzler
Donja Darai
Affiliation:
Department of Economics, University of Zurich, Blümlisalpstr. 10, 8006 Zurich, Switzerland
Dario Sacco
Affiliation:
Department of Economics, University of Zurich, Blümlisalpstr. 10, 8006 Zurich, Switzerland
Armin Schmutzler*
Affiliation:
Department of Economics, University of Zurich, Blümlisalpstr. 10, 8006 Zurich, Switzerland
*
e-mail: armin.schmutzler@soi.uzh.ch
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Abstract

The paper analyzes the effects of more intense competition on firms’ investments in process innovations. More intense competition corresponds to an increase in the number of firms or a switch from Cournot to Bertrand competition. We carry out experiments for two-stage games, where R&D investment choices are followed by product market competition. An increase in the number of firms from two to four reduces investments, whereas a switch from Cournot to Bertrand increases investments, even though theory predicts a negative effect in the four-player case. The results arise both in treatments in which both stages are implemented and in treatments in which only one stage is implemented. However, the positive effect of moving from Cournot to Bertrand competition is more pronounced in the former case.

Keywords

R&D investmentIntensity of competitionExperiment

JEL classification

O31: Innovation and Invention: Processes and Incentives C92: Laboratory, Group Behavior L13: Oligopoly and Other Imperfect Markets
Type
Research Article
Information
Experimental Economics , Volume 13 , Issue 4 , December 2010 , pp. 439 - 460
Copyright
Copyright © Economic Science Association 2010

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Footnotes

For helpful comments and suggestions, we are grateful to Michael Kosfeld, Adrian Müller, Max Pfister and to participants at the following conferences: ESA (Rome), EEA (Budapest), EARIE (Valencia), and Swiss IO Day (Berne).

Electronic supplementary material The online version of this article (doi: 10.1007/s10683-010-9250-8) contains supplementary material, which is available to authorized users.

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