Working Paper: NBER ID: w10258
Authors: Kristian R. Miltersen; Eduardo S. Schwartz
Abstract: In this article we develop a model to analyze patent-protected R&D investment projects when there is (imperfect) competition in the development and marketing of the resulting product. The competitive interactions that occur substantially complicate the solution of the problem since the decision maker has to take into account not only the factors that affect her/his own decisions, but also the factors that affect the decisions of the other investors. The real options framework utilized to deal with investments under uncertainty is extended to incorporate the game theoretic concepts required to deal with these interactions. Implementation of the model shows that competition in R&D, in general, not only increases production and reduces prices, but also shortens the time of developing the product and increases the probability of a successful development. These benefits to society are countered by increased total investment costs in R&D and lower aggregate value of the R&D investment projects.
Keywords: R&D investment; patents; competition; pharmaceuticals; real options
JEL Codes: G31; O32; O22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition in R&D investment (O39) | Increases production (E23) |
| Competition in R&D investment (O39) | Reduces prices (D49) |
| Competition in R&D investment (O39) | Shortens time required for product development (O36) |
| Competition in R&D investment (O39) | Enhances probability of successful development (O22) |
| Competition in R&D investment (O39) | Increases total investment costs (G31) |
| Competition in R&D investment (O39) | Lowers aggregate value of R&D investment projects (G31) |