Encouraging Upstream Experimentation and Downstream Coordination in a Design and Development Game

Upstream players produce design ideas and downstream players select among these ideas to develop finished products. Design diversity is valuable at the upstream stage and coordination is valuable at the downstream stage, in the sense that this maximizes the sum of payoffs to all players. However, this outcome is not always realized since both the upstream and downstream players may have an individual incentive to use different strategies, so that coordination occurs too soon or not at all. This problem is associated with too much predictability or too little difference in the relative value of designs. We show that an intermediary whose interests align with the industry as a whole can solve either problem by selecting among designs in such a way that occasionally rewards inferior ideas, so long as the intermediary has enforcement power or can extract commitments from downstream players. We discuss the application of the model to technology standards, political primaries, and trend-driven industries