Allocating resources to research and development projects in a competitiveenvironment

Firms who are involved in R&D activities are often "racing" against competi tors to become the first to attain the desired breakthrough. The goal might indeed be to "beat" the competitors in as many such R&D races as possible. However, when resources are limited, and competitors' budget allocation to these R&D activities unknown, the challenge becomes to devise a method of allocating R&D budgets to activites in a strategically "optimal" way. We mo del the decision problem of a firm wishing to allocate a fixed budget among several activities, so as to maximize the expected profit from the activit ies it captures. The probability of capturing an activity is an increasing function of one's allocation to it, and a decreasing function of the compet itor's allocation. For a specific plausible capture-probability function, w e find the optimal allocation between two activities conditional on the com petitor's allocation (the "reaction curve"). Nash and Stackelberg equilibri a for that model are then characterized. We also briefly explore the implic ations of more general, or different, capture-probability functions.