In this article we develop a model to analyze patent-protected R&D investment projects when there is (imperfect) competition in the development and marketing of the resulting product. The competitive interactions that occur substantially complicate the solution of the problem since the decision maker has to take into account not only the factors that affect her/his own decisions, but also the factors that affect the decisions of the other investors. The real options framework utilized to deal with investments under uncertainty is extended to incorporate the game theoretic concepts required to deal with these interactions. Implementation of the model shows that competition in R&D, in general, not only increases production and reduces prices, but also shortens the time of developing the product and increases the probability of a successful development. These benefits to society are countered by increased total investment costs in R&D and lower aggregate value of the R&D investment projects.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10258.
Length: Date of creation: Feb 2004 Date of revision: Handle: RePEc:nbr:nberwo:10258
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Find related papers by JEL classification: G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Fudenberg, Drew & Tirole, Jean, 1986.
"A Theory of Exit in Duopoly,"
Econometrica,
Econometric Society, vol. 54(4), pages 943-60, July.
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