R&D Competition between an Incumbent and an Entrant : An Integrated Model of R&D Investment, Performance Improvement, and Time-to-Market

In this paper, we set up a game theoretical model in which an incumbent and an entrant choose their respective R&D strategies to compete with each other. Our paper contributes to three major debates regarding a firm's R&D strategy: the incumbent's and the entrant's choice between a radical R&D project and an incremental one, the incumbent's decision of whether to pre-empt the entrant, and the trade-off between product quality improvement and time-to-market. Our model considers three decisions that both the entrant and the incumbent need to make: (1) the amount of investment in the R&D project, (2) timing of new product introduction, and (3) the magnitude of performance improvement. These three decisions completely define a firm's R&D strategy. As for the product performance improvement, the entrant has to decide whether to introduce an incrementally improved product or a drastically improved one. With the incrementally improved product, the entrant can enter the market earlier at a low R&D cost, but it will lag behind the incumbent in product performance. On the other hand, with the drastically improved product, the entrant may be able to leapfrog the incumbent in product performance, but the downside is that the entry needs to be delayed or more investment in the R&D project is needed. The entrant's strategy is further affected by the incumbent's potential reaction. The incumbent, anticipating the entrant's entry, can react by either improve its product incrementally or drastically. The incumbent can even pre-empt the entrant's entry by introducing its new product before the entry occurs