“Revealing Private Information in a Patent Race”
by Pavel Kocourek
In this paper I study dynamic and strategic aspects of R&D rivalry. I consider a patent race in which the first firm to make two consecutive breakthroughs wins the prize. A breakthrough arrives with instantaneous probability equal to the firm’s R&D effort level, and its arrival is observed privately. A firm varies its effort as it updates its belief about the rival’s progress. I find that a firm drops its effort over time until its first breakthrough arrives, in which case the effort jumps up and keeps increasing until one of the players patents. Further, I investigate whether a firm would want to reveal success in order to discourage its rival. I find that a firm never reveals if its rival has, and is first to reveal when a breakthrough is hard to achieve. When breakthroughs arrive quickly the firm prefers secrecy to revelation. For intermediate levels of research difficulty firm’s revelation behavior entails randomization or delay. Interestingly, when there are more than two players, equilibrium always entails revelation.