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Real Option Games with R&D and Learning Spillovers

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  • Martzoukos, Spiros H
  • Zacharias, Eleftherios

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

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