Real option games with R&D and learning spillovers

Spiros H. Martzoukos and Eleftherios Zacharias

Omega, 2013, vol. 41, issue 2, 236-249

Abstract: We demonstrate to decision makers how to optimally make costly strategic pre-investment R&D decisions in the presence of spillover effects in an option pricing framework with analytic tractability. Decisions are modeled as impulse-type controls with random outcome. Two firms face two decisions that are solved 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 closed-loop stochastic game with (path-dependency inducing) switching costs that make strategy revisions harder. When conditions of learning-by-doing exist, we find that strategy shifts are easier to observe in market environments of high growth and high volatility.

Keywords: Cost benefit analysis; Real options; Game theory; R&D (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (7)

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Working Paper: Real Option Games with R&D and Learning Spillovers (2008)
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DOI: 10.1016/j.omega.2012.05.005

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