Hostname: page-component-7b7567c8c-7pwfn Total loading time: 0 Render date: 2026-11-14T20:14:55.137Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get accessRights & Permissions [Opens in a new window]

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 IncentivesC92: Laboratory, Group BehaviorL13: Oligopoly and Other Imperfect Markets

Information

Type
Research Article
Information
Experimental Economics , Volume 13 , Issue 4 , December 2010, pp. 439 - 460
Copyright
Copyright © Economic Science Association 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

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.

References

Aghion, P., Bloom, N., Blundell, R., Griffith, R., & Howitt, P. (2005). Competition and innovation: an inverted U relationship. Quarterly Journal of Economics, 120, 701–728.Google Scholar
Boone, J. (2000). Competition. CEPR Discussion Paper, No. 2636.10.2139/ssrn.249144CrossRefGoogle Scholar
Cohen, W. M., & Levin, R. C. (1989). Empirical studies of innovation and market structure. In Schmalensee, R. & Willig, R. D. (Eds.), The handbook of industrial organization. Amsterdam: Elsevier.Google Scholar
Darai, D., Großer, J., & Trhal, N. (2009). Patents versus subsidies—A laboratory experiment. SOI Working Paper, No. 0905, University of Zurich.Google Scholar
Davis, D., & Reilly, R. J. (1998). Do too many cooks always spoil the stew? An experimental analysis of rent-seeking and the role of a strategic buyer. Public Choice, 95, 89–115.CrossRefGoogle Scholar
Dufwenberg, M., & Gneezy, U. (2000). Price competition and market concentration: An experimental study. International Journal of Industrial Organization, 18(1), 7–22.10.1016/S0167-7187(99)00031-4CrossRefGoogle Scholar
Engelmann, D., & Strobel, M. (2004). Inequality aversion, efficiency, and maximin preferences in simple distribution experiments. American Economic Review, 94(4), 857–869.CrossRefGoogle Scholar
Fischbacher, U. (2007). Z-Tree. Toolbox for readymade economic experiments. Experimental Economics, 10(2), 171–178.10.1007/s10683-006-9159-4CrossRefGoogle Scholar
Gilbert, R. J. (2006). Competition and innovation. Journal of Industrial Organization Education, 1(1), 1–23.10.2202/1935-5041.1007CrossRefGoogle Scholar
Gneezy, U., & Smorodinsky, R. (2006). All-pay auctions—An experimental study. Journal of Economic Behavior and Organization, 61, 255–275.CrossRefGoogle Scholar
Greiner, B. (2004). The online recruitment system ORSEE 2.0—A guide for the organization of experiments in economics. Working Paper Series in Economics, No. 10, University of Cologne.Google Scholar
Harsanyi, J. (1973). Games with randomly disturbed payoffs: A new rationale for mixed-strategy equilibrium points. International Journal of Game Theory, 2, 1–23.10.1007/BF01737554CrossRefGoogle Scholar
Huck, S., Normann, H. T., & Oechssler, J. (2004). Two are few and four are many: Number effects in experimental oligopolies. Journal of Economic Behavior and Organization, 53(4), 435–446.10.1016/j.jebo.2002.10.002CrossRefGoogle Scholar
Isaac, R. M., & Reynolds, S. S. (1988). Appropriability and market structure in a stochastic invention model. Quarterly Journal of Economics, 103(4), 647–671.10.2307/1886068CrossRefGoogle Scholar
Isaac, R. M., & Reynolds, S. S. (1992). Schumpeterian competition in experimental markets. Journal of Economic Behavior and Organization, 17, 59–100.10.1016/0167-2681(92)90079-QCrossRefGoogle Scholar
Nickell, S. J. (1996). Competition and corporate performance. Journal of Political Economy, 104, 724746.10.1086/262040CrossRefGoogle Scholar
Orzen, H. (2008). Counterintuitive number effects in experimental oligopolies. Experimental Economics, 11, 1386–4157.10.1007/s10683-007-9174-0CrossRefGoogle Scholar
Sacco, D., & Schmutzler, A. (2008). All-pay auctions with negative prize externalities: Theory and experimental evidence. SOI Working Paper, No. 0806, University of Zurich.10.2139/ssrn.1291085CrossRefGoogle Scholar
Sacco, D., & Schmutzler, A. (2010, forthcoming). Is there a U-shaped relation between competition and investment? International Journal of Industrial Organization, doi:10.1016/j.ijindorg.2009.09.003.CrossRefGoogle Scholar
Schmutzler, A. (2010). The relation between competition and innovation—Why is it such a mess? CEPR Discussion Paper, No. 7640.Google Scholar
Sheremeta, R. M. (2010). Experimental comparison of multi-stage and one-stage contests. Games and Economic Behavior, 68(2), 731–747.10.1016/j.geb.2009.08.001CrossRefGoogle Scholar
Suetens, S. (2005). Cooperative and noncooperative R&D in experimental duopoly markets. International Journal of Industrial Organization, 23, 63–82.10.1016/j.ijindorg.2004.11.004CrossRefGoogle Scholar
Suetens, S. (2008). Does R&D cooperation facilitate price collusion? An experiment. Journal of Economic Behavior and Organization, 66, 822–836.10.1016/j.jebo.2007.01.002CrossRefGoogle Scholar
Suetens, S., & Potters, J. (2007). Bertrand colludes more than Cournot. Experimental Economics, 10, 71–77.10.1007/s10683-006-9132-2CrossRefGoogle Scholar
Vives, X. (2008). Innovation and competitive pressure. Journal of Industrial Economics, 56, 419–469.CrossRefGoogle Scholar
Supplementary material: File

Darai et al. supplementary material

Comment to the Instructions
Download Darai et al. supplementary material(File)
File 246 KB
Supplementary material: File

Darai et al. supplementary material

Darai et al. supplementary material
Download Darai et al. supplementary material(File)
File 3.2 MB