Skip to main content
Article thumbnail
Location of Repository

Strategic delay in a real options model of R&D competition

By Helen Weeds


This paper considers irreversible investment in competing research projects with uncertain returns under a winner-takes-all patent system. Uncertainty takes two distinct forms: the technological success of the project is probabilistic, while the economic value of the patent to be won evolves stochastically over time. According to the theory of real options uncertainty generates an option value of delay, but with two competing firms the fear of preemption would appear to undermine this approach. In non-cooperative equilibrium two patterns of investment emerge depending on parameter values. In a preemptive leader-follower equilibrium firms invest sequentially and option values are reduced by competition. A symmetric outcome may also occur, however, in which investment is more delayed than the single-firm counterpart. Comparing this with the optimal cooperative investment pattern, investment is found to be more delayed when firms act non-cooperatively, as each holds back from investing in the fear of starting a patent race. Implications of the analysis for empirical and policy issues in R&D are considered

Topics: HD
Publisher: University of Warwick, Department of Economics
Year: 2000
OAI identifier:

Suggested articles


  1. (1982). 3 Thus the cost of R&D is fixed, or contractual in the terminology of Kamien and Schwartz
  2. (1985). 5 For further details see Fudenberg and Tirole
  3. (1991). 9 An analogous effect is found in the duopoly models of Smets
  4. (1988). A general model of R&D competition and policy,” doi
  5. (1988). A theory of dynamic oligopoly I: Overview and quantity competition with large fixed costs,” doi
  6. (1986). A theory of exit in duopoly,” doi
  7. (1991). A theory of stopping time games with applications to product innovations and asset sales,” Columbia University Discussion Paper Series no. doi
  8. (1985). Brownian Motion and Stochastic Flow Systems, doi
  9. (1991). Dynamic R&D competition under ‘hazard rate’ uncertainty,” doi
  10. (1989). Entry and exit decisions under uncertainty,” doi
  11. (1991). Game Theory, doi
  12. (1991). Irreversible investment with price ceilings,” doi
  13. (1988). Irreversible investment, capacity choice, and the value of the firm,” doi
  14. (1979). Market structure and innovation,” doi
  15. (1981). On the diffusion of new technology: A game-theoretic approach,” doi
  16. (1985). Preemption and rent equalisation in the adoption of new technology,” doi
  17. (1983). Preemption, leapfrogging, and competition in patent races,” doi
  18. (1997). Real options and preemption,” University of Cambridge, JIMS Working paper no.
  19. (1996). The strategic exercise of options: Development cascades and overbuilding in real estate markets,” doi
  20. (1986). The value of waiting to invest,” doi
  21. (1983). Uncertain innovation and the persistence of monopoly,” doi
  22. (1980). Uncertainty, industrial structure, and the speed of R&D,” doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.