Real options in an asymmetric duopoly: who benefits from your competitive disadvantage?

This paper analyzes the impact of investment cost asymmetry on the optimal real option exercise strategies and the value of firms in duopoly. Both firms have an opportunity to invest in a project enhancing (ceteris paribus) the profit flow. We show that three types of equilibrium strategies exist. Furthermore, we express the critical levels of cost asymmetry delineating the equilibrium regions as functions of basic economic variables. The presence of strategic interactions among the firms leads to counterintuitive results. First, for a certain range of the asymmetry level, a marginal increase in the investment cost of the firm with the cost disadvantage can enhance this firm's own value. Moreover, such a cost increase can reduce the value of the competitor. Finally, we discuss the welfare implications of the optimal exercise strategies and show that the presence of identical firms can result in a socially less desirable outcome than if one of the competitors has a significant cost (dis)advantage

Strategic Process And Product Innovation

The study analyzes the timing of process and product innovations. A dynamic product differentiation model illustrates strategic interaction in a duopoly. Firms use asymmetric equilibrium strategies for the adoption of innovations, i.e. innovations are adopted sequentially. The priority of process innovation over product innovation depends on the relative magnitude of the two innovations. Empirical evidence from the semiconductor industry illustrates asymmetric adoption patterns for innovations.Product and process innovation, game theory, semiconductor industry J.E.L. classification: L19, 031,

Subsidizing Cooperative And Noncooperative R&D: An Equivalence Result?

We show for a widely-used class of models for strategic R&D that optimally subsidizing cooperative R&D or noncooperative R&D leads to the same level of private R&D investments. We then highlight the limitations of the framework that are responsible for this finding and conclude that policy recommendations based on the type of model used here should be treated as highly tentative.R&D subsidies, cooperative R&D, differentiated oligopoly, JEL Classification L43; O32,