Allocating resources to research and development projects in a competitive environment

Allocating resources to research and development projects in a competitive environment

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Article ID: iaor20021004
Country: United States
Volume: 31
Issue: 9
Start Page Number: 827
End Page Number: 834
Publication Date: Jan 1999
Journal: IIE Transactions
Authors: ,
Keywords: game theory
Abstract:

Firms who are involved in RandD activities are often ‘racing’ against competitors to become the first to attain the desired breakthrough. The goal might indeed be to ‘beat’ the competitors in as many such RandD races as possible. However, when resources are limited, and competitors' budget allocation to these RandD activities is unknown, the challenge becomes to devise a method of allocating RandD budgets to activities in a strategically ‘optimal’ way. We model the decision problem of a firm wishing to allocate a fixed budget among several activities, so as to maximize the expected profit from the activities it captures. The probability of capturing an activity is an increasing function of one's allocation to it, and a decreasing function of the competitor's allocation. For a specific plausible capture-probability function, we find the optimal allocation between two activities conditional on the competitor's allocation (the ‘reaction curve’). Nash and Stackelberg equilibria for that model are then characterized. We also briefly explore the implications of more general, or different, capture-probability functions.

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