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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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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, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  2. Hoppe, Heidrun C. & Lee, In Ho, 2003. "Entry deterrence and innovation in durable-goods monopoly," European Economic Review, Elsevier, Elsevier, vol. 47(6), pages 1011-1036, December.
  3. Johannes Van Biesebroeck, 2003. "Productivity Dynamics with Technology Choice: An Application to Automobile Assembly," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(1), pages 167-198, January.
  4. Kort, P.M., 1996. "Optimal R&D Investments of the Firm," Discussion Paper, Tilburg University, Center for Economic Research 1996-47, Tilburg University, Center for Economic Research.
  5. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  6. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Reinganum, Jennifer R., 1982. "Uncertain Innovation and the Persistence of Monopoly," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 431, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 620-38, June.
  11. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, American Economic Association, vol. 72(3), pages 514-26, June.
  12. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(358), pages 266-93, June.
  13. Giuseppe Moscarini & Lones Smith, 2001. "The Optimal Level of Experimentation," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1629-1644, November.
  14. Thomas, Louis A., 1999. "Incumbent firms' response to entry: Price, advertising, and new product introduction," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(4), pages 527-555, May.
  15. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
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