Competition and strategic alliance in R&D investments: a real option game approach with multiple experiments
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Competition and strategic alliance in R&D investments: a real option game approach with multiple experiments Giovanni Villani1 · Marta Biancardi2 Received: 19 February 2020 / Accepted: 6 October 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract In this paper, we analyse the effects that the number and outcomes of R&D experiments have on the strategic equilibria between two firms that can both compete and cooperate in a context of uncertainty. As is well known, R&D projects are characterised by the sequentiality of investments and by the outcomes obtained from the success or failure of their experiments. Furthermore, the positive results and the number of tests carried out in R&D increase the market value of the innovative product. The Real Option Approach evaluates the flexibility of R&D investments and the strategic scenarios. According to Nash equilibria, we show how the market value threshold, for which the investment policy is optimal, depends on the number of experiments and on the information revelation. Keywords Real options · Game theory · Information revelation · R&D investments JEL Classification G13 · C70 · D80 · O32
1 Introduction Real Options Theory analyses the financial instruments applied to real assets, while game theory introduces strategic interactions between firms. R&D investment generates new opportunities to promote economic development, to change market structure and to potentially remove rivals from a given field. This particularly applies to some
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Giovanni Villani [email protected] Marta Biancardi [email protected]
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Department of Economics and Finance, University of Bari, Largo Abbazia S. Scolastica, 53, 70124 Bari, Italy
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Dipartimento Jonico “Sistemi Giuridici ed Economici del Mediterraneo: Societá, Ambiente, Culture”, University of Bari, Via Duomo, 259 , 74100 Taranto, Italy
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G. Villani, M. Biancardi
high-tech industries, like the pharmaceutical, software and semiconductor industries, where monitoring the R&D investment, rather than price competition, is prudent. Unfortunately, a R&D project is not often intended to yield immediate profits and generally is characterised by high investment uncertainty. These characteristics and the ability of delayed entry are not all taken into account by traditional net present value (NPV) and internal rate of return (IRR) methods. In this context, the Real Option Analysis (ROA) meets the criteria required to support managers decisions.1 In the following literature, various ways of evaluating projects have been extensively studied. In Shackleton and Wojakowski (2003), Lee (1997), Trigeorgis (1991) and Majd and Pindyck (1987), it is assumed that the option exercise price and investment cost are fixed. However, it is important to consider the option exercise as a stochastic variable. The exchange option can be employed to value R&D investments in which both the gross project value and the investment cost are uncertain. For this purpose, as described in McDonald and Siegel (1985), a European exchang
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