This paper considers investment behavior of duopolistic firms subject

to technological progress. It is assumed that initially both firms offer a

homogeneous product, but after a stochastic waiting time they are able to

realize a product innovation. Production capacities of both firms are prod-

uct specific. It is shown that firms anticipate a future product innovation

by under-investing (if the new product is a substitute to the established

product) and higher profits, and over-investing (in case of complements)

and lower profits, compared to the corresponding standard capital accu-

mulation game. This anticipation effect is stronger in the case of R&D

cooperation. Furthermore, since due to R&D cooperation firms introduce

the new product at the same time, this leads to intensified competition

and lower firm profits right after the new product has been introduced. In

addition, we show that under R&D competition the firm that innovates

first, overshoots in new-product capacity buildup in order to exploit its

temporary monopoly position. Taking into account all these effects, the

result is that, if the new product is neither a close substitute nor a strong

complement of the established product, positive synergy effects in R&D

cooperation are necessary to make it more profitable for firms than R&D

competition.