Strategic Information Revelation and Revenue Sharing in an R & D Race with Learning Labs

The interaction between firms' incentives to learn, communicate and to develop their product innovation is studied for different settings. Firms learn about their costs of development by investing in research. After learning, firms decide what information to reveal, and how much to invest in development. Two effects of information revelation are central to the analysis. First, a firm's revelation has a strategic effect. It provides its rival with information about the firm's relative cost efficiency in development. When a firm is expected to be a more efficient investor in development, this discourages its rival's development investments. This effect therefore gives firms an incentive to bias their revelation towards revealing only good news about themselves. The second effect is an informational effect, and conflicts with the strategic effect. When costs of development investments are positively correlated, each firm learns about its own cost of investment from his rival's revelation. This gives firms an incentive to only reveal bad news to their rival. Bad news makes rivals pessimistic about their development costs, and discourages development investments. The interaction between these two conflicting effects determines firms' incentives to acquire, reveal and further build upon information. In this paper the firms' costs of development are perfectly correlated, and therefore the informational effect generically dominates. When firms share revenues this effect is countervailed by free-rider incentives. The relative strength of the two effects determines firm's incentives to invest and reveal information. The verifiability of firms' private information is crucial in determining how much information can and will be revealed between firms. Unverifiable information can never be revealed credibly, while verifiable information results in unravelling for extreme revenue shares only.