Realized Rate of Innovation under Competition

Peichun Wang, Ph.D. Student in Business Economics and Public Policy

Abstract: Why do Apple and Samsung sometimes hold back advanced features when they release new products? Are they simply waiting for reasonable production cost or are they strategically spreading out their innovation? How does imperfect intellectual property protection affect these firm decisions? How do durability of the products and the presence of secondary markets play a role in these industry dynamics? First in this study, a model is developed to determine the optimal realized rate of innovation in technology industries where monopolistic or oligopolistic competition is present. In a repeated game under Cournot or Bertrand competition with asymmetric efficiency, strategic R&D investments could be determined (Ishida, et al., 2011), but it is theoretically unclear how innovations are distributed dynamically. With knowledge accumulation (Doraszelski, 2003), innovations are serially correlated, but if the shocks to innovation success densities are serially correlated (especially negatively), then firms would have incentives to hide their innovation results. A novel dataset is then used on patents and investments of smartphone R&D to empirically estimate such industry dynamics and capture the strategic innovation behaviors of firms in the technology industry.