R&D investments with competitive interactions using the real option game approach

In this article we develop a model to analyze patent-protected R&D investment projects when there is. an asymmetrical competition in the development and marketing of the resulting product. The competitive interactions 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. This paper presents the optimal investment threshold values and the optimal investment rule of high-efficient firm, and showed that the investment threshold values are reduced by competition of two firms. Finally, the mixed investment strategy for two firms are discussed in the paper, and give the probability which each firm exercise the option to invest, also present the probability of simultaneous exercise of the. option to invest for two firms.