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Optimal R&D Investment Strategies with Quantity Competition under the Threat of Superior Entry

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  • Ruslan Lukach
  • Peter M. Kort
  • Joseph Plasmans

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 non-monotonic.

Suggested Citation

  • Ruslan Lukach & Peter M. Kort & Joseph Plasmans, 2005. "Optimal R&D Investment Strategies with Quantity Competition under the Threat of Superior Entry," CESifo Working Paper Series 1385, CESifo.
    • Handle: RePEc:ces:ceswps:_1385
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    References listed on IDEAS

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    Keywords

    investment under uncertainty; real options; R&D; competition;
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