Abstract

This thesis consists of three chapters. The first chapter reports a laboratory experiment on dynamic patent races in an indefinite horizon with complete information. In the experiment, we examine how the players react to a leader/follower or symmetric/asymmetric position as well as the distance between the initial knowledge stock and the target. Our results show that the individual average effort is highest for the players who are in a tie position, second highest for the leaders and lowest for the followers and the spillovers in the previous round significantly increase the players’ investment in the current round. By comparing the first and second half of the session, we observe an overall learning effect on the pure-strategy equilibrium play, but efficiency loss remains throughout the session.

The second chapter investigates the effect of R&D subsidies on the innovating firms’ quality investment choices and profits as well as social welfare in a duopoly market with product substitutability, demand spillovers and consumers’ quality sensitivity. Taking the non-cooperative and cooperative scenarios into account, the optimal R&D subsidy levels are solved in a way to maximize the social welfare. Compared with no-subsidy, the firms are better off under the R&D subsidy policy. Furthermore, it is always socially beneficial to subsidize the non-cooperative regime or the cooperative agreement.

The third chapter considers a two-stage strategic R&D model in a duopoly market. In the first stage, two firms decide simultaneously whether to compete or to cooperate by choosing the level of R&D investment that might decrease the investing firm’s production cost and the rival’s cost through the absorptive capacity. In the second stage, after observing the R&D outcome, the two firms play the classical Cournot in order to maximize their own profits. Under the stochastic R&D technology with low or high symmetric absorptive capacity, I find that the difference between the optimal R&D expenditures under defection and those under cooperation becomes larger as the probability of success increases. Regardless of whether the absorptive capacities of the two firms are same or different, except at the critical threshold, the R&D outcomes always align with the prisoner's dilemma situation.