R&D productivity and the nexus between product substitutability and innovation: theory and experimental evidence

Abstract

The present study proposes a theoretical model that investigates how R&D productivity influences the relationship between product substitutability and R&D investment in a duopolistic market. We argue that the effects on R&D investment are more complex than the previous literature suggests. We show theoretically that, in unlevelled industries, the laggard’s R&D investment decreases with product substitutability regardless of the R&D productivity level. In sharp contrast, in levelled industries, whether R&D investment increases or decreases with product substitutability depends crucially on the level of the R&D productivity. We choose parameters and formulate testable predictions that we take to the laboratory. We find that subjects’ behavior is largely consistent with the model’s predictions.

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ORCID for Carmine Ornaghi: orcid.org/0000-0003-2704-2537

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