The proposed project investigates an incumbent’s decision to pursue radical or incremental innovation when facing a rival entrant. Radical innovations hold the promise of superior rewards and obsoleting the existing product technology, but beyond development risks market acceptance of these innovations are very difficult to predict. Radical innovation is also particularly attractive to the rival entrant: if the market for it pans out, such an innovation obsoletes the existing technology and any incremental improvements to it. Part of firms’ challenge is to assess the market potential for these opportunities; another part is to factor in competitive pressures. Each firm has its own assessment of the market potential for the radical innovation, and the reliability of these market forecasts can differ. By using a game-theoretical model, the proposed project will show that the two aspects of radical innovations mentioned above are in many ways intertwined. A decision by a rival to pursue or forgo a given radical opportunity not only has implications for whether future product market competition to sell the innovation will be intense, but also has signaling implications as to whether the rival believes a market for the innovation will exist. More specifically, the entrant can draw inferences about the incumbent’s beliefs from its innovation strategy choice, which in turn affects the entrant’s R&D investment level in developing radical innovation. The analyses will also be conducted for when the incumbent’s innovation strategy decision is unobservable, but the incumbent is allowed to communicate its innovation plans. The results will show how the signaling implications of the incumbent’s innovation strategy choice affect its incentives to untruthfully communicate its innovation plans. Due to its anti-competitive implications, these results would be especially useful for policy makers.
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