Knowledge Sharing and R&D Investment

Abstract

We consider an R&D race between two symmetric firms. The game consists of two stages. In the first stage, firms non-cooperatively decide upon their levels of investment in R&D which, in turn, determine the Poisson probabilities of their subsequent sucesses. In the second stage, they engage in a Nash bargaining game to share their knowledge. We show that the firms over-invest and earn lower profits if knowledge sharing is possible compared to the situation where it is not. Hence, before the first stage, if the firms are given the option of precommitting to no knowledge sharing, they will do so and be better off. The society, of course, would be better off with full knowledge sharing.