Optimal R&D Investment Strategies with Quantity Competition under the Threat of Superior Entry
University of Antwerp - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Tilburg University
University of Antwerp - Faculty of Applied Economics; CPB Netherlands Bureau of Economic Policy Analysis
Peter M. Kort
Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)
CESifo Working Paper Series No. 1385
This paper studies R&D investment decisions of a firm facing the threat of new technology entry and subject to technical uncertainty. We distinguish four scenarios: inevitable entry, entry deterrence, entry blockade, and non-credible entry threat. The entry threat stimulates the incumbent to innovate in case entry prevention is possible, but discourages R&D if entry is inevitable. In the case of entry deterrence the incumbent successfully prevents entry by innovating. Greater technical uncertainty stimulates starting R&D and can result in implementation of more expensive research projects. The welfare analysis shows that the relation between welfare and entry cost and between welfare and uncertainty is nonmonotonic.
Number of Pages in PDF File: 39
Keywords: investment under uncertainty, real options, R&D, competition
JEL Classification: C72, D21, O31working papers series
Date posted: January 14, 2005
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