This paper presents an experimental study of dynamic indefinite horizon R&D races with uncertainty and multiple prizes. The theoretical predictions are highly sensitive: small parameter changes determine if we should expect technological competition, and if so whether it is sustained, or if the market converges into one with entrenched leadership and lower aggregate R&D. The subjects’ strategies are far less sensitive. In most of the treatments, the R&D races tend to converge to entrenched leadership. We propose and apply a quantal response extension of Markov perfection that is qualitatively and largely quantitatively consistent with the experimental observations.
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We are grateful for the financial support of the Deutsche Forschungsgemeinschaft (BO-747/8), the UEA ESRC Centre for Competition Policy (CCP), and the Deutsche Bundesbank. Comments from Morten Hviid, Andreas Nicklisch, John Hey, Sabine Kröger, two anonymous referees and participants of a CCP seminar presentation, the Economic Science Association conference in Alessandria (September 2005) and the European Economic Association Conference in Vienna (September 2006) are gratefully acknowledged. The usual disclaimer applies.
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Breitmoser, Y., Tan, J.H.W. & Zizzo, D.J. Understanding perpetual R&D races. Econ Theory 44, 445–467 (2010). https://doi.org/10.1007/s00199-009-0487-4
- Markov quantal response equilibrium