Competition, innovation, and the effect of R&D knowledge

This paper analyzes the effect of learning-by-doing in R&D on firms’ incentives to innovate. As a benchmark without learning it is shown that relaxing the usual assumption of imposed imitation yields additional strategic effects. Therefore, the leader’s R&D effort increases with the gap as she is trying to avoid competition in the future. When firms gain experience by performing R&D technological leaders rest on their laurels allowing followers to catch up. Contrary to the benchmark case, the leader’s innovation effort declines with the lead. This causes an equilibrium where the incentives to innovate are highest when competition is most intense.