Inducing Variety: A Theory of Innovation Contests

Abstract

This article analyzes the design of innovation contests when the quality of an innovation depends on the research approach, but the best approach is unknown. Inducing a variety of research approaches generates an option value. We show that suitable contests can induce such variety. The buyer‐optimal contest is a bonus tournament, where suppliers can choose only between a low bid and a high bid. This contest implements the socially optimal variety for a suitable parameter range. Finally, we compare the optimal contest to scoring auctions and fixed‐prize tournaments.

Killer Acquisitions and Beyond: Policy Effects on Innovation Strategies

“…More broadly related areBryan and Lemus (2017) who study the direction of innovation,Letina and Schmutzler (2019) who consider research variety in innovation contests,Bardey et al (2016) who analyze the effect of health insurance policy on diversity of treatment options and Bavly et al (2020) who introduce asymmetric beliefs about the success of different projects.13 This difference to our work arises because the authors allow large firms to sell their own product and the target's product after the acquisition, so that there is an additional value from applying an innovation to the target's product as well as the own product.14 While the results of the two papers are similar, the central mechanisms differ. InKamepalli et al (2020), expectations of "techies" (potential early adopters of a new technology) drive the result.…”

Designing Dynamic Research Contests

“…29 Several other directions have been explored in the static setting. Letina and Schmutzler (2019) consider the optimal contest design when the agents can choose their approach to innovation and the principal attempts to give them incentives to diversify their approaches because of the resulting option value. They find that the optimal contest is a bonus tournament, where a winner gets a fixed prize, plus a bonus if he outperforms the second best agent with a high enough margin.…”

Social Welfare in Search Games with Asymmetric Information

“…In what follows we discuss the implications of Theorem 1 in the setup of an innovation contest (e.g., Che & Gale, 2003;Adamczyk et al, 2012;Erat & Krishnan, 2012;Bryan & Lemus, 2017;Letina & Schmutzler, 2019;Mihm & Schlapp, 2019;Matros et al, 2019), in which a contest designer, who wishes to maximize the social payoff, might influence the private payoffs of players by offering a monetary reward to the prize's finder, which is added to the finder's private value.…”

“…These situations (henceforth, search games) are common in various important areas such as R&D races in oligopolistic markets (e.g., Loury et al, 1979;Fershtman & Rubinstein, 1997;Chatterjee & Evans, 2004;Konrad, 2014;Akcigit & Liu, 2015;Letina, 2016;Liu & Wong, 2019), design of innovation contests (e.g., Che & Gale, 2003;Adamczyk et al, 2012, Erat & Krishnan, 2012Bryan & Lemus, 2017;Letina & Schmutzler, 2019;Mihm & Schlapp, 2019;Matros et al, 2019), pharmaceutical research (e.g., Matros & Smirnov, 2016;de Roos et al, 2018), academic research (e.g., Kleinberg & Oren, 2011), and product design within a firm (e.g., Loch et al, 2001). Most of the existing literature assumes that all agents have symmetric information regarding the prize's location.…”