This paper focuses on two firms’ uncertain innovative activities with production experiences in a two-stage dynamic game. We assume that the incumbent’s production experiences from the first stage affect its and its rival’s investment strategies in the second stage R&D competition via the hazard rate functions. This assumption implies two consequences. One is that the challenger has a greater incentive to invest than its rival does in the second-stage R&D race. Hence, a sequence of innovations cannot guarantee that the incumbent will keep on capturing a sufficiently high share of the post-innovation market and dominating in the new innovations. The second result is that the increase in the incumbent’s production experiences promotes its investments if the production experiences make a significant contribution to the slope of the firm’s hazard rate function to its investments. This study further shows that the incumbent’s second-stage investment grows up with an increase in its production experiences if it is a winner in the first-stage race and the contribution of the production experiences to the slope of the firm’s hazard rate functions to their investments is large enough.
Finally, when all firms’ investment strategies are complementary, the incumbent’s optimal invests in the second-stage race must be greater than its optimal choices without production experiences whether it is a winner or a loser in the first- stage R&D competition.
