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A Strategic R&D Investment with Flexible Development Time in Real Option Game Analysis

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Author Info
Giovanni Villani ()
Abstract

The real option theory provides a useful tool to evaluate an R&D investment under uncertainty because, unlike the NPV (Net Present Value), it considers the managerial flexibility that may be expand the investment opportunity value. However, most R&D investment projects are open to competing firms in the same industry or line of business, and so the strategic considerations become extremely important. In this paper we analyze a real option game between two firms that invest in R&D. The firm that invests first, defined as the Leader, acquires a first mover advantage that we assume as a higher market share than other one, namely the Follower, that postpones its R&D investment decision. But, several R&D investments present positive externalities and so, the option exercise by the Leader generates an “Information Revelation” that benefits the Follower. Moreover, to value the flexibility time to realize the development phase, we consider the American-Exchange type options.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2728.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2728

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Related research
Keywords: American Exchange options; game theory; Montecarlo simulation; R&D; information revelation;

Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

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  15. Bruno S. Frey, 2009. "A multiplicity of approaches to institutional analysis. Applications to the government and the arts," IEW - Working Papers iewwp420, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  17. Subhasish M. Chowdhury & Dan Kovenock J. & Roman M. Sheremeta, 2009. "An Experimental Investigation of Colonel Blotto Games," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  20. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains Taxation in the Real World," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  23. Kurt Schmidheiny & Marius Brülhart, 2009. "On the Equivalence of Location Choice Models: Conditional Logit, Nested Logit and Poisson," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  24. Lars P. Feld & Christoph A. Schaltegger, 2009. "Political Stability and Fiscal Policy - Time Series Evidence for the Swiss Federal Level since 1849," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  28. Oliver Himmler, 2009. "The Effects of School Competition on Academic Achievement and Grading Standards," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  31. Aleksandra Riedl & Silvia Rocha-Akis, 2009. "Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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