Resource Allocation among Competing Innovators

Many innovative products are designed to satisfy the demand of specific target consumers; thus, the innovators will inevitably compete with each other in the product market. We investigate how a profit-maximizing principal should properly allocate her limited resources to support the innovations of multiple potentially competing innovators. We find that, as the available resources increase, the optimal diversification of investment may first increase and then decrease. This interesting nonmonotone pattern is driven by a trade-off between the risk of innovation failure and rent dissipation because of competition. Using this framework, we also analyze a nonprofit principal seeking to maximize the total number of successful innovations, the probability of at least one innovator succeeding, consumer surplus, and total social welfare. A nonprofit principal tends to invest more diversely compared with a for-profit counterpart.