| This dissertation explores the impact of accumulated knowledge and competition on research and development (R&D) strategy formulation. Competition is modeled as a two-player innovation race game in which players' effort levels jointly determine the rate at which prizes are awarded. Players simultaneously allocate their R&D resources to a fixed "portfolio" consisting of two projects; the solution concept is Nash equilibrium under complete information. The allocation decision is complicated by the fact that players are asymmetric, and each may have competencies that favor one activity over another. Three models are developed using this framework. The first model explores R&D allocations in a static setting in which each firm's effort is independent of its rival's. This model is then extended to allow for midstream technology transfers, or spillovers. Lastly, a dynamic version of the game is explored in which firms compete in a repeated discounted stochastic game. The outcome in each stage of the game affects the relative knowledge positions of the rivals. Numerical solution techniques are employed whenever closed-form solutions are unattainable. Firms' equilibrium allocation strategies are described, and sensitivity analyses demonstrate how allocations shift with changes in key model parameters.; In the static model, firms allocate more R&D resources in equilibrium to more highly valued projects. The presence of competition causes symmetric firms to intensify their R&D efforts relative to firms acting optimally in isolation. Knowledge advantages permit firms to leverage their enhanced productivity by shifting resources to where they will generate greater expected marginal returns, i.e., to exploratory areas. Technological spillovers draw increased R&D effort, particularly when firms anticipate that spillovers will cause large productivity increases. Firms vying for either "first mover" or "fast imitator" positions will intensify their efforts regardless of the outcome.; In the dynamic setting, closely matched firms can change relative knowledge positions many times over the long run. Even though equilibrium strategies are constructed to protect advantages, the uncertainty inherent to innovation races inevitably leads to cycles of industry leadership. |
