Department of Applied Mathematics & Physics, Kyoto University

Technical Report 2006-014 (October 29, 2006)

R&D Competition in Alternative Technologies: A Real Options Approach
by Michi Nishihara and Atsuyuki Ohyama

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We study a problem of R\&D competition using a real options approach. We extend the analysis of Weeds [26] in which the project is of a fixed standard to the case where the firms can choose the target of the research from two alternative technologies of different standards. We show that the competition affects not only the firms' investment time, but also their choice of the standard of the technology. Two typical cases, namely the de facto standard case and the innovative case, are examined in full detail. In particular, in the de facto standard case, the firms could develop a lower-standard technology that would never appear in a noncompetitive situation. This provides a good account of a real problem resulting from too bitter R\&D competition.