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R&D Cooperation in Real Option Game Analysis

  • Giovanni Villani

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    Cooperative investments in R&D are a significant driving force of the modern economy. As it well-known, the R&D investments are uncertain and the strategic alliances create synergies and additional information that increase the success probabilities about R&D projects. The theory of real option games takes into account both the flexibility value of an investment opportunity and the strategic considerations. In particular way, while the non-cooperative options are exercised in the interest of the option holders' payoffs, the cooperative ones are exercised in order to maximize the total partnership value. In our model we develop an interaction between two firms that invest in R&D and we show the effects of cooperative synergies on several equilibriums. Moreover, we consider that the R&D investments are characterized by positive network externalities that induce more benefits in case of reciprocal R&D success.

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    File URL: http://www.dsems.unifg.it/q192008.pdf
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    Paper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 19-2008.

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    Length: 29 pages
    Date of creation: Oct 2008
    Date of revision:
    Handle: RePEc:ufg:qdsems:19-2008
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    Web page: http://www.dsems.unifg.it

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    1. repec:ner:tilbur:urn:nbn:nl:ui:12-84087 is not listed on IDEAS
    2. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    3. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June.
    4. Kong, Jean J. & Kwok, Yue Kuen, 2007. "Real options in strategic investment games between two asymmetric firms," European Journal of Operational Research, Elsevier, vol. 181(2), pages 967-985, September.
    5. Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
    6. Armada, Manuel Rocha & Kryzanowski, Lawrence & Pereira, Paulo Jorge, 2007. "A modified finite-lived American exchange option methodology applied to real options valuation," Global Finance Journal, Elsevier, vol. 17(3), pages 419-438, March.
    7. Mark Shackleton & Rafal Wojakowski, 2002. "The Expected Return and Exercise Time of Merton-style Real Options," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(3&4), pages 541-555.
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