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Optimal R&D Investment Strategies with Quantity Competition under the Threat of Superior Entry

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  • Ruslan Lukach
  • Peter M. Kort
  • Joseph Plasmans

Abstract

This paper studies R&D investment decisions of a firm facing the threat of new technology entry and subject to technical uncertainty. We distinguish four scenarios: inevitable entry, entry deterrence, entry blockade, and non-credible entry threat. The entry threat stimulates the incumbent to innovate in case entry prevention is possible, but discourages R&D if entry is inevitable. In the case of entry deterrence the incumbent successfully prevents entry by innovating. Greater technical uncertainty stimulates starting R&D and can result in implementation of more expensive research projects. The welfare analysis shows that the relation between welfare and entry cost and between welfare and uncertainty is non-monotonic.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-01/cesifo1_wp1385.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1385.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1385

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Keywords: investment under uncertainty; real options; R&D; competition;

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  1. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  2. Kort, P.M., 1996. "Optimal R&D Investments of the Firm," Discussion Paper 1996-47, Tilburg University, Center for Economic Research.
  3. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  5. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-48, September.
  6. Giuseppe Moscarini & Lones Smith, 2001. "The Optimal Level of Experimentation," Econometrica, Econometric Society, vol. 69(6), pages 1629-1644, November.
  7. Johannes van Biesebroeck, 2003. "Productivity Dynamics with Technology Choice: An Application to Automobile Assembly," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 167-198.
  8. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Hoppe, Heidrun C. & Lee, In Ho, 2003. "Entry deterrence and innovation in durable-goods monopoly," European Economic Review, Elsevier, vol. 47(6), pages 1011-1036, December.
  10. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  11. Johannes Van Biesebroeck, 2000. "Measuring Productivity Dynamics with Endogenous Choice of Technology and Capacity Utilization: An Application to Automobile Assembly," Working Papers 00-16, Center for Economic Studies, U.S. Census Bureau.
  12. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  13. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
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