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Optimal R&D Investment Strategies with Quantity Competition under the Threat of Superior EntryJoseph PlasmansUniversity of Antwerp - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Tilburg University Ruslan LukachUniversity of Antwerp - Faculty of Applied Economics; CPB Netherlands Bureau of Economic Policy Analysis Peter M. KortTilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER) January 2005 CESifo Working Paper Series No. 1385 Abstract: 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, O31 working papers seriesDate posted: January 14, 2005Suggested CitationContact Information
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