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Real Option Games with R&D and Learning Spillovers

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Author Info
Martzoukos, Spiros H
Zacharias, Eleftherios

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Abstract

We model pre-investment R&D decisions in the presence of spillover effects in an option pricing framework with analytic tractability. Two firms face two decisions that are solved for interdependently in a two-stage game. The first-stage decision is: what is the optimal level of coordination (optimal policy/technology choice)? The second-stage decision is: what is the optimal effort for a given level of the spillover effects and the cost of information acquisition? The framework is extended to a two-period stochastic game with (path-dependency inducing) switching costs that make strategy revisions harder. Strategy shifts are easier to observe in more volatile environments.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12686.

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Date of creation: Apr 2008
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Handle: RePEc:pra:mprapa:12686

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Related research
Keywords: Benefit Analysis; Real Options; Coordination Games; R&D;

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Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  12. Tao, Zhigang & Wu, Changqi, 1997. "On the organization of cooperative research and development: Theory and evidence," International Journal of Industrial Organization, Elsevier, vol. 15(5), pages 573-596, August. [Downloadable!] (restricted)
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  21. Bronwyn H. HALL & Raffaele ORIANI, 2004. "Does the Market Value R&D Investment by European Firms? Evidence from a Panel of Manufacturing Firms in France," Economics Working Papers ECO2004/13, European University Institute. [Downloadable!]
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