The Timing of Version Releases in R&D-intensive Industries: A Dynamic Duopoly Model

Abstract The strategic timing of version releases is a prevalent issue in many,R&D-intensive industries. In such industries, a …rm accumulates R&D successes for some time be- fore strategically deciding to incorporate,these improvements,into a new,version (or new,generation) of its product. This paper,presents a dynamic,model,of duopolistic competition,that endogenizes,each …rm’s decisions over how,much,to invest in R&D and when,to release successive generations,of its product. We uncover,a wide variety of qualitatively di¤erent equilibria that demonstrate,that the nature of the bene…ts of leadership –i.e., the magnitude of the bene…ts and the rate at which they set in as a lead grows –plays a key role in determining,…rms’equilibrium,behavior. We …nd that if the bene…ts of leadership are su¢ ciently high, …rms engage in preemption races char- acterized by intense investment and frequent version releases. Alternatively, …rms may accommodate,one another in order to alleviate the burden,of costly R&D activities and version releases; in a phase of accommodation, the market leader releases new versions less frequently, while the follower curtails its investment. Finally, we show that changes in the cost of releasing a new version and in the inherent uncertainty that characterizes the version release process a¤ect equilibrium,behavior and industry structure in inter- esting and non-trivial ways; most notably and perhaps counterintuitively, we …nd that an increase in the expected,cost of releasing a new,version can actually increase the frequency,with which,…rms release new,versions. I am very grateful for the invaluable guidance provided by David Besanko, Ulrich Doraszelski, Sarit