[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/bep/rmswpp/2-2-1023.html
   My bibliography  Save this paper

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

Author

Listed:
  • Hao Zhao

    (Rutgers University)

Abstract
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 improving its product incrementally or drastically. The incumbent can even pre-empt the entrant's entry by introducing its new product before the entry occurs. We find that, when trading off time-to-market against quality improvement, both the incumbent and the entrant should emphasize quality improvement over time-to-market. Specifically, the entrant should enter the market with a drastically improved new product, even if it means that the entry has to be delayed. The incumbent, anticipating the entrant's move, should react by introducing a drastically improved new product as well. Therefore, in the debate about the relative importance of time-to-market and quality improvement, we side with the school of thoughts that emphasizes the latter. Furthermore, we find that there is no need for the incumbent to pre-empt the entrant's move, i.e., the incumbent should introduce its new product only after entry even if it is certain about entry at the very beginning. This is different from Gilbert and Newbery's (1982) finding that the incumbent should pre-empt the entrant, and it is also different from Kamien and Schwartz (1972) who show that the incumbent will delay its R&D indefinitely in the face of competition. As for the incumbent's and the entrant's choices of either a radical innovation or an incremental one, our finding is consistent with the conventional wisdom that the entrant should introduce a radically innovative product (Day and Shoemaker 2000). However, our findings on the incumbent's choice of R&D project differ from any existing studies that advocate a cautious approach (e.g., Reinganum 1983). In recent years, many leading companies in various industries have come to the same conclusion and began to invest in more drastic R&D projects (see Chandy and Tellis 2000), as advocated by our findings. Our findings are also different from other studies in that we have produced clear and easy-to-understand findings. In contrast, many existing studies (e.g., Ali, Kalwani and Kovenock 1993; Cohen, Eliashberg, and Ho 1996; Bayus, Jain and Rao 1997) provide more nuanced but also ambiguous results that depend on market conditions that are difficult to empirically validate. The intuition for our major finding that both the incumbent and the entrant should engage in radical R&D projects is relatively straightforward. Consider the entrant first. If the entrant enters the market with an incrementally improved product, such is not forceful enough to challenge the incumbent's dominant position; hence, it is a dominated strategy by a drastic R&D project. And, knowing that the entrant's product will be always drastically improved, the incumbent should react likewise to protect its leadership position. The optimal entry time for the entrant and the reaction time for the incumbent are determined according to the trade-off of R&D costs and firm profits, and in equilibrium, the incumbent will not pre-empt entry to minimize its R&D costs. We also study the scenario where the incumbent does not anticipate the entry. In this case, in order to take advantage of the incumbent's delayed reaction, the entrant should accelerate its entry, but should not change its product strategy, that is, is should still introduce a drastically improved new product. Although being caught off guard by the entrant's surprise entry, the incumbent should not react hastily. Rather, it should proceed with the same pace in its R&D process as in the previous case and introduce a drastically improved new product.

Suggested Citation

  • Hao Zhao, 2003. "R&D Competition Between an Incumbent and an Entrant: An Integrated Model of R&D Investment, Performance Improvement, and Time-to-Market," Review of Marketing Science Working Papers 2-2-1023, Berkeley Electronic Press.
    • Handle: RePEc:bep:rmswpp:2-2-1023
    Note: oai:bepress:roms-1023
    as

    Download full text from publisher

    File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=1023&context=roms
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Morris A. Cohen & Jehoshua Eliasberg & Teck-Hua Ho, 1996. "New Product Development: The Performance and Time-to-Market Tradeoff," Management Science, INFORMS, vol. 42(2), pages 173-186, February.
    2. Jennifer F. Reinganum, 1981. "On the Diffusion of New Technology: A Game Theoretic Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(3), pages 395-405.
    3. F. M. Scherer, 1967. "Research and Development Resource Allocation Under Rivalry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 81(3), pages 359-394.
    4. Abdul Ali & Manohar U. Kalwani & Dan Kovenock, 1993. "Selecting Product Development Projects: Pioneering versus Incremental Innovation Strategies," Management Science, INFORMS, vol. 39(3), pages 255-274, March.
    5. Gary C. Fethke & John J. Birch, 1982. "Rivalry and the Timing of Innovation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 272-279, Spring.
    6. Kamien, Morton I & Schwartz, Nancy L, 1972. "Timing of Innovations Under Rivalry," Econometrica, Econometric Society, vol. 40(1), pages 43-60, January.
    7. Billie Jo Zirger & Modesto A. Maidique, 1990. "A Model of New Product Development: An Empirical Test," Management Science, INFORMS, vol. 36(7), pages 867-883, July.
    8. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 383-401.
    9. Rebecca Henderson, 1993. "Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 248-270, Summer.
    10. Paul Windrum, 2001. "Late Entrant Strategies in Technological Ecologies," International Studies of Management & Organization, Taylor & Francis Journals, vol. 31(1), pages 87-105, March.
    11. Lynn O. Wilson & John A. Norton, 1989. "Optimal Entry Timing for a Product Line Extension," Marketing Science, INFORMS, vol. 8(1), pages 1-17.
    12. Pankaj Ghemawat, 1991. "Market Incumbency and Technological Inertia," Marketing Science, INFORMS, vol. 10(2), pages 161-171.
    13. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-293, June.
    14. Ram C. Rao & David P. Rutenberg, 1979. "Preempting an Alert Rival: Strategic Timing of the First Plant by Analysis of Sophisticated Rivalry," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 412-428, Autumn.
    15. Anirudh Dhebar & Shmuel S. Oren, 1985. "Optimal Dynamic Pricing For Expanding Networks," Marketing Science, INFORMS, vol. 4(4), pages 336-351.
    16. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bayus Barry & Chintagunta Pradeep, 2003. "Competitive Entry and Pricing Responses to Product Innovation," Review of Marketing Science, De Gruyter, vol. 1(1), pages 1-26, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Franses, Ph.H.B.F. & Hernández-Mireles, C., 2006. "When Should Nintendo Launch its Wii? Insights From a Bivariate Successive Generation Model," ERIM Report Series Research in Management ERS-2006-032-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Harabi, Najib, 1994. "Technischer Fortschritt in der Schweiz: Empirische Ergebnisse aus industrieökonomischer Sicht [Technischer Fortschritt in der Schweiz:Empirische Ergebnisse aus industrieökonomischer Sicht]," MPRA Paper 6725, University Library of Munich, Germany.
    3. François Jeanjean, 2021. "Impact of Technical Progress on the Relationship Between Competition and Investment," Journal of Industry, Competition and Trade, Springer, vol. 21(1), pages 81-101, March.
    4. Michael Peneder & Martin Woerter, 2014. "Competition, R&D and innovation: testing the inverted-U in a simultaneous system," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 653-687, July.
    5. Kaplan, Todd R. & Luski, Israel & Wettstein, David, 2003. "Innovative activity and sunk cost," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1111-1133, October.
    6. Thomas, Louis A., 1999. "Adoption order of new technologies in evolving markets," Journal of Economic Behavior & Organization, Elsevier, vol. 38(4), pages 453-482, April.
    7. Cohen, Wesley M., 2010. "Fifty Years of Empirical Studies of Innovative Activity and Performance," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 129-213, Elsevier.
    8. Bruno Cassiman & Masako Ueda, 2006. "Optimal Project Rejection and New Firm Start-ups," Management Science, INFORMS, vol. 52(2), pages 262-275, February.
    9. Dinlersoz, Emin M. & Pereira, Pedro, 2007. "On the diffusion of electronic commerce," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 541-574, June.
    10. Elie Ofek & Miklos Sarvary, 2003. "R&D, Marketing, and the Success of Next-Generation Products," Marketing Science, INFORMS, vol. 22(3), pages 355-370, July.
    11. Barrie R. Nault & Mark B. Vandenbosch, 2000. "Research Report: Disruptive Technologies—Explaining Entry in Next Generation Information Technology Markets," Information Systems Research, INFORMS, vol. 11(3), pages 304-319, September.
    12. Prajit K. Dutta & Saul Lach & Aldo Rustichini, 1995. "Better Late than Early: Vertical Differentiation in the Adoption of a New Technology," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 563-589, December.
    13. Farzin, Y. H. & Huisman, K. J. M. & Kort, P. M., 1998. "Optimal timing of technology adoption," Journal of Economic Dynamics and Control, Elsevier, vol. 22(5), pages 779-799, May.
    14. Henkel, Joachim & Rønde, Thomas & Wagner, Marcus, 2015. "And the winner is—Acquired. Entrepreneurship as a contest yielding radical innovations," Research Policy, Elsevier, vol. 44(2), pages 295-310.
    15. Richard A. Jensen, 1980. "A Duopoly Model of the Adoption of an Innovation of Uncertainty Profitability," Discussion Papers 434, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    16. Ron N. Borkovsky, 2017. "The timing of version releases: A dynamic duopoly model," Quantitative Marketing and Economics (QME), Springer, vol. 15(3), pages 187-239, September.
    17. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 315-338, February.
    18. David Audretsch & Agustí Segarra & Mercedes Teruel, 2014. "Why don't all young firms invest in R&D?," Small Business Economics, Springer, vol. 43(4), pages 751-766, December.
    19. Gilbert Richard J, 2006. "Competition and Innovation," Journal of Industrial Organization Education, De Gruyter, vol. 1(1), pages 1-23, December.
    20. Drew Fudenberg, 2015. "Tirole's Industrial Regulation and Organization Legacy in Economics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(3), pages 771-800, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bep:rmswpp:2-2-1023. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: http://www.bepress.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.