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An option pricing approach to investment in innovations in a competitive environment

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  • Reiß, Ariane

Abstract

In this paper it is illustrated how option-based valuation can be used to determine whether and when a firm should patent and adopt an Innovation if the arrival time of competitors is stochastic. Four distinct strategies are derived: Apply for a patent without introducing the new technology right away, patent the Innovation and invest immediately, initiate the new project without patent protection, or defer the decision. It is shown how competition and the level of patent fee determines the strategy to be pursued and the maximum amount of R&D expenditures.

Suggested Citation

  • Reiß, Ariane, 1997. "An option pricing approach to investment in innovations in a competitive environment," Tübinger Diskussionsbeiträge 116, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:116
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    File URL: https://www.econstor.eu/bitstream/10419/104835/1/tdb116.pdf
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    References listed on IDEAS

    as
    1. Grenadier, Steven R. & Weiss, Allen M., 1997. "Investment in technological innovations: An option pricing approach," Journal of Financial Economics, Elsevier, vol. 44(3), pages 397-416, June.
    2. Stadler, M, 1991. "R&D Dynamics in the Product Life Cycle," Journal of Evolutionary Economics, Springer, vol. 1(4), pages 293-305, November.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    Cited by:

    1. Reiss, Ariane, 1998. "Investment in Innovations and Competition: An Option Pricing Approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 635-650.

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