The thesis consists of three parts. In the first part of the thesis, we analyze preemptive patenting in a two-stage real options game where an incumbent firm competes with a potential entrant firm for the patent of a substitute product in a product market with profit flow uncertainty. Our patent-investment game model assumes that the entrant has complete information on the incumbent’s commercialization cost while the incumbent only knows the distribution of the entrant’s cost. We investigate the impact of information asymmetry on the preemption strategies adopted by the two competing firms on patenting the substitute product by comparing the optimal preemption strategies and the real option value functions of the two competing firms under complete information and information asymmetry....[ Read more ]

The thesis consists of three parts. In the first part of the thesis, we analyze preemptive patenting in a two-stage real options game where an incumbent firm competes with a potential entrant firm for the patent of a substitute product in a product market with profit flow uncertainty. Our patent-investment game model assumes that the entrant has complete information on the incumbent’s commercialization cost while the incumbent only knows the distribution of the entrant’s cost. We investigate the impact of information asymmetry on the preemption strategies adopted by the two competing firms on patenting the substitute product by comparing the optimal preemption strategies and the real option value functions of the two competing firms under complete information and information asymmetry. We also examine how information asymmetry may affect the occurrence of sleeping patent and the corresponding expected duration between the two stages of patenting and product commercialization.

In the second part of the thesis, we consider the characterization of strategic equilibria associated with an asymmetric R&D race between an incumbent firm and an entrant firm in the development of a new product with market and technological uncertainty. The random arrival time of the discovery of the patent protected innovative product through R&D effort is modeled as a Poisson process. Input spillover on R&D effort is modeled by the change in the leader’s hazard rate of success of innovation upon follower’s entry into the R&D race. Asymmetry between the two competing firms include sunk costs of investment, stochastic revenue flow rates generated from the product, hazard rates of success of R&D efforts of the two firms. Using real options game models, we analyze the optimal strategies adopted by the two firms in their strategic entry into the R&D phase. The impact of various parameters on the firms’ optimal strategies is also discussed.

In the third part of te thesis, we present a single-firm stochastic control problem which the firm is allowed to manage its R&D effort during its R&D stage. We derive the Hamilton-Jacobi-Bellman formulation of the problem. We propose an efficient algorithm of solving the equation numerically. The proof of convergence of the numerical scheme is provided. Finally, we examine various economic phenomena associated with optimal control on R&D effort.