Innovation races:An experimental study on strategic research activities

In an experimental setting, firms in a duopoly market engage in a patent tournamentand compete for profit-enhancing product advancements. The firms generateincome by matching exogenously defined demand preferences with an appropriatelycomposed product portfolio of their own. Demand preferences are initially unknownand first need to be revealed by an investigation of the possible product variations.The better firms approximate demand preferences, the higher their profits. In theensuing innovation race, firms interact through information spillovers resulting fromthe imperfect appropriability of research successes. In the random period of the experiment,the continuity of the search process is disturbed by an exogenous shockthat affects both the supply and demand side and again spurs research competition.Firms may henceforth explore an enlarged product space in attempting to matchthe equally modified demand preferences. In our analysis, we explore the behavioralregularities of agents who are engaged in innovation activities. As a key element wetest to what extend relative economic performance exercises a stimulating effect onthe implementation of innovation and imitation strategies.