Survey of Option Game Theory of R&D Investment

Yu-ling Liao Business School Central South University Changsha, China e-mail: nohmily027@163.com
Abstract:The paper generally analyzes the development history of option game theory about R&D based on the knowledge of common meaning of enterprise R&D strategy. Like other branch realms of the option game theories, the research of R&D investment option game theory comes from the innovative contributions of Smet (1991),Dixit & Pindyck(1994,1996),Smit& Ankum(1993) and Smit & Trigeorgis(1997). On the basis of these papers, option game theory of R&D investment can not only handle the uncertainty of R&D or technology adoption, but also the problems of strategic technology adoption taking into account network effects, and the option game equilibrium of multi-stage R&D (or patent) competition. The latest development comes from these papers which consider asymmetric information or cooperative behavior. In sum, the general framework of option game theory on R&D investment is still needed to develop. Key words: R&D, option game, technology adoption

Qian-lin Hong School of Economics Sichuan University Chengdu, China e-mail: hql13@sina.com the concept of mixed strategy equilibrium in the original market model (ie, investment projects have been running). On the other hand, Smit and Ankum[8] established a first discrete option game model. Since then, Smit and Trigeorgis[9] use an integrated real options and game-theoretic framework for strategic R&D investments to analyze two-stage games where the growth option value of R&D depends on endogenous competitive reactions. It can be said that this is not only taken into consideration R&D (investment) feature, but also used the first research results of option game theory. In 2001, Huisman and Kort s inductive work[10] of option game theory and principles has great influence in the field of literature review of options game research. Since then, Boyer, Gravel and Lasserre[11] reviewed the option game model literature in accordance with the mathematical model features. In 2001, Yinghui An and Wei Zhang reviewed some results of option game theory, which made a inductive analysis of the options game analysis method[12]. Since then, shanchong Shi and zhang Wei summarized a real option game analysis framework which can be applied to enterprise strategic management[13]. Hui Xia, Yong Zeng and Xiaowo Tang had some of the real option and the option game literature review from the perspective of R&D and technology investment[14]. Purpose of this study was to summarize the development and thinking focus of R&D investment option game theory through the establishment and improving analysis of option game model research. II. THE BASIC MODEL OF R&D INVESTMENT OPTION GAME

I.

INTRODUCTION

Enterprise R&D strategy generally refers to competitive strategy of competing companies in technology innovation and adoption of new technology, and Uncertainty is the basic characteristics of R&D strategy. This uncertainty mainly comes from two aspects, one is technological uncertainty, second is market uncertainty. The former mainly refers to the speed and intensity of technological change is uncertain, and this uncertainty makes further uncertainty of R&D project cycle, the success rate and investing; the latter mainly refers to the market of R&D projects or products in the market is uncertain. With the deepening research on R&D strategy in the real options theory, R&D strategic interaction features for the meaning of the right choice of corporate R&D investment strategy also been highlighted. Thus, the method of option game combining real options and game theory which not only consider the value of real options under uncertainty, but also consider the strategic interactive value under the main game, will naturally become the latest cutting-edge of the R&D strategies research. The standard option game method is based on Smet(1991)[1]and Dixit & Pindyck (1994 ,1996)'s first contribution [2-3]. Their study actually established two different types of continuous option game model which are the new market model and the original market model. Dixit and Pindyck set a standard analysis model of the new market, and game theory Smet established the first standard model of original market using the option game theory. In 1998 and 1999, Huisman and Kort's four series of research papers[4-7] showed that the standard option game model can be expanded from a technical innovation point of view, which introduced

A. The Discrete Model of R&D Investment Option Game The standard form of discrete options game is established by Smit and Ankum (1993). Smit and Trigeorgis (1997) has the largest contribution to the development of this model, and the latest and most important theoretical progress has come from their research (Smit & Trigeorgis, 2003, 2004, 2006). In 1997, Smit and Trigeorgis use an integrated real options and game-theoretic framework for strategic R&D investments to analyze two-stage games where the growth option value of R&D depends on endogenous competitive reactions. In this model firms choose output levels endogenously and may have different (asymmetric) production costs as a result of R&D, investment timing differences or learning. The model illustrates the tradeoff between the flexibility value and the strategic commitment value of R&D that interacts with market structure via altering the competitor's equilibrium quantity or changing the market structure altogether (e.g., from Cournot equilibrium

978-1-4244-8694-6/11/$26.00 2011 IEEE

to Stackelberg or monopoly). Comparative statics provide rich results for competitive R&D strategies depending on uncertainties in market demand and in the outcome of R&D, on whether R&D benefits are proprietary or shared, on imperfect or asymmetric information with signaling, on learning or experience cost effects, and on competition in R&D versus cooperation via a joint research venture[9]. In 2003, Smit analyzes the optional and strategic features of infrastructure investment. Infrastructure investments generate other investment opportunities, and in so doing change the strategic position of the enterprise. A combination of real options theory and game theory can capture the elusive value of a strategic modification of a firm's position in its industry. An analysis of European airport expansion shows that airports with infrastructures that are less constrained by growth regulations capture more value, because they are in a better position to exercise growth options available in the airport industry[15]. Smit and Trigeorgis (2003) illustrates the use of real options and game theory principles to value prototypical investment projects and capture important competitive/strategic dimensions in a step-by-step analysis of investment decisions (options) under uncertainty. It first illustrates the application of real options principles to a mining concession and to an R&D program. It then provides examples from innovation cases and uses basic game theory principles to discuss other strategic and competitive aspects, especially applicable to oligopolistic industries like consumer electronics. The issue of whether (and when) it is optimal to compete independently or coordinate/collaborate (e.g., via joint R&D ventures or strategic alliances) is given particular attention[16]. Smit and Trigeorgis (2004) develop an integrated real options and industrial organization framework to quantify the strategic option value of technology investments. Strategic investments (e.g., R&D, capacity expansion or strategic acquisitions) are difficult to analyze based on standard approaches. Yet, it is these decisions that determine a firms competitive success in a changing technological and competitive landscape. How much is a strategic option (e.g., Microsofts growth opportunities) worth? How does one analyze strategic options in a dynamic, competitive environment? It describes basic principles for analyzing competitive strategies under uncertainty based on an integration of real options with game theory, and analyzes multi-stage investment decisions facing a firm under uncertainty, both under a proprietary setting and when facing exogenous or endogenous competition (both in the last stage of commercialization as well as in the innovation or R&D stage). Competitive strategies may differ, e.g., depending on the type of investment (proprietary or shared) and the nature of competitive reactions (strategic substitutes or complements). The benefits of cooperation (via joint R&D ventures) vs. direct R&D competition (innovation races) are also discussed in this paper. Finally, it analyzes multiperiod option games with endogenous volatility and discuss various other extensions[17]. Smit and Trigeorgis (2006) illustrate the use of real options valuation and game theory principles to analyze prototypical investment opportunities involving important

competitive/strategic decisions under uncertainty. It uses examples from innovation cases, alliances and acquisitions to discuss strategic and competitive aspects, relevant in a range of industries like consumer electronics and telecom. It particularly focuses on whether it is optimal to compete independently or coordinate/collaborate via strategic alliances[18]. B. Continuous R&D Investment Option Game Model In 1998, Huisman and Kort have recognized that a better technology will become available later. It discusses how to start the analysis when the firm should adopt a new technology, while it has to fight for a market share with an identical firm on the output market [4]. Two technologies are considered: a current one which can he adopted now, and a new one which is more efficient and enters the input market at a known future date. Learning is incorporated in the sense that it is less costly to adopt and successfully implement the new technology if it has adopted the current technology before. This analytical framework from the Grenadier and Weiss[19], but they have expansion in the situation of the uncertainty of new technologies available time with a number of companies. Huisman and Kort studies have shown that a specific time interval, a firm invests in the current technology, but it is optimal when the other waits with investment until the new technology become available. Which companies do better depending on comparison between early entrants current temporary monopoly profits before the new technology arrives with higher yields after more efficient new technology arrives. Their outcomes range from preemption equilihria to equilihria with second mover advantages. A second mover advantages arises when it has a higher payoff than monopoly profits. These second mover advantages can be proved from empirical studies. There are a lot of cases about early entrants keeping the advantage of market share, but many early entrants did not survive the competition of later entrants. In other words, for competitive R&D enterprises, different equilibrium outcome implies a different optimal investment rules[20]. In a series of research papers to discuss the "R&D technology adoption", Huisman and Kort[5] about the technical adoption of a duopoly introduced Stenbacka and Tombak[21] research framework, also used Fudenberg and Tirole[22] study result. Fudenberg and Tirole study a scenario of a duopoly with identical firms that both have the option to upgrade their technology. To do so they have to pay a sunk cost, while it holds that this sunk cost decreases over time. Thus the later a firm acquires this technology the less it costs. They show that the outcome is either a preemption equilibrium with dispersed investment timings and rent equalization, or a joint adoption equilibrium. Extensions of the Fudenberg-Tirole framework include research of Stenbacka, Tombak and Hoppe[23]. Stenbacka and Tombak introduce the time interval of uncertainty from technology obtainment time to the successful implementation. Hoppe introduces technological uncertainty into a timing game of new technology adoption. They believe that once the technology is acquired, the true value of the technology is revealed, which is observed by the rival firm. In this way, the firm that invests second free-rides on the risk the first firm has taken by investing in a technology of unknown value, which may lead to second mover advantages. This study

shows that the timing neither necessarily involves first-mover advantages in precommitment equilibria nor rent-equalization due to the threat of preemption. Rather, there may be secondmover advantages because of informational spillovers. In the same technology adoption environment, Huisman and Kort assume the time between R&D (technology) adoption and successful implementation is uncertain. Their study found that under a certain scenario dispersed adoption timings turn into joint-adoption when firm roles become endogenous. Further, it is shown that for reasonable parameter values it can happen that the profit stream belonging to the preemption equilibrium is that low that both firms are even better off if they both decide to stick to producing with their old technology forever[5]. Further, Huisman and Kort[24] study a dynamic duopoly in which firms compete in the adoption of new technologies. The innovation process is exogenous to the firms. Two companies are likely to adopt a current technology, or wait for a better technology that will arrive in an unknown point in the future. In Specific moment of investment, the enterprise goes into the market that the profit flow is stochastically evolving according to a Brownian motion process. R&D investment strategy selection largely depends on the probability that a new technology arrives. If this probability is low, companies will use current technology, leading to preemption game in general. The result of the preemption game will change by the increase of probability. They also point out that this further increase could turn a preemption game into a war of attrition, which is a game where the second mover will be better than the first mover. Yet, when the probability of new technologies is large enough, the two companies will adopt new technologies. On the other hand, Huisman and Kort [6] consider the technology investment decision of a firm is analyzed, while competition on the output market is explicitly taken into account. Technology choice is irreversible and the firms face a stochastic innovation process with uncertainty about the speed of arrival of new technologies. The innovation process is exogenous to the firms. For reasons of market saturation and the fact that more modern technologies are invented as time passes, the demand for a given technology decreases over time. This implies that also the sunk cost investment of each technology decreases over time. In their research, introducing the waiting curve as a new concept, the investment decision problem is transformed into a timing game. An algorithm is designed for solving this (more) general timing game. The algorithm is applied to an information technology investment problem. The most likely outcome exhibits diffusion with equal payoffs for the firms. Based on Stenbacka and Tombak[21 study, Boyer and Clamens[25] noted that American corporations will spend some $50 billion US in 1997 on reengineering projets. It is believed that two thirds of these efforts will end up in failure because of significant resistance to change and a lack of concensus and commitment among senior executives. Very little effort has been exerted to foster our understanding of the strategic differences between adopting and implementing a new technology. So, their extensibility model shows how the adoption timing decisions in a sequential duopoly structure are affected by more efficient implementation programs, higher

relative gains of being the first (and second) to successfully implement the technology, and lower relative investment costs of adopting the new technology. Their results also suggest that subsidizing the adoption of new technologies in first-mover firms or second-mover firms may have negative impacts on the mean adoption timings in an industry. III. THE EXPANSIBILITY ANALYSIS OF R&D INVESTMENT OPTION GAME MODEL

A. Considering the Network Effects of Technology Adoption Option Game By contrast with Huisman and Kort[5] concerned about their own interests and technology adoption value evaluation of R&D projects, other scholars pay more attention to the network effect of R&D investments. In this regard, Moretto[26] provides a model of technology adoption considering network effect in a dynamic programming framework in the case where adopting alone is more expensive than adopting when others have already done so (network effect). In addition, if each agent gains at the expense of his rivals, he may also have an incentive for preemptive adoption. In this analysis, technology adoption is seen as a strategic switching time decision problem for agents facing an ongoing stochastic operating benefit plus sunken investment costs. The model defines the option value of investing for a continuous time stochastic game. In the case of network benefits alone, agents follow a stationary bandwagon strategy, representing the effect caused by a war of attrition. Yet, as network benefits reduce adoption costs after an agent has switched, rivals may follow suit. In the opposite case, where going first gives the innovator a higher payoff the bandwagon rule is turned over and the option value of investing first may be lower than that of going second. This gives rise to sequential adoption. Also based on the connections between network effect and technology adoption, Mason and Weeds[27] examines the irreversible adoption of a technology whose returns are uncertain, when there is an advantage to being the first adopter, but a network advantage to adopting when others also do so. Two patterns of adoption emerge: sequential, in which the leader aggressively preempts its rival; and a more accommodating outcome in which the firms adopt simultaneously. There are two main results. First, conditional on adoption being sequential, the follower adopts at the incorrect point, compared to the cooperative solution. The leader adopts at the cooperative point when there is no preemption, and too early if there is preemption. Secondly, there is insufficient simultaneous adoption in equilibrium. This paper examines the effect of uncertainty, network effects and preemption on these inefficiencies. Standard results do not always hold. Preemption may actually increase the time to first adoption, since simultaneous adoption is more likely to occur in equilibrium with preemption. Their analysis also raises the unusual possibility that an increase in uncertainty may cause the first mover to adopt the technology earlier. For (R&D) technology adoption issues, Doraszelski[28] extends the literature on technology adoption by introducing a distinction between technological breakthroughs (innovations) and the engineering refinements

(improvements) that follow such a breakthrough. Firms do not necessarily wait for a future technological breakthrough, but instead have an incentive to delay the adoption of a new technology until it is sufficiently advanced. They characterize a firms adoption decision as the solution to a continuous time, infinite horizon dynamic programming problem, which gives rise to an ordinary differential equation that is highly non-linear and does not have a closed-form solution. They employ projection techniques and show how these techniques can be applied to the analysis of optimal stopping problems. B. A Multiple-stage Patent Race Option Game between Two Rival Firms Another important area of R&D option game development is to consider directly competition (game) problem between R&D agents. The reseach of R&D race has more attention to the game equilibrium feature of R&D agents and value evaluation of R&D project. The first R&D (patents) race model originates from Lambrecht model in 1999[29]. By assumption of dynamic option game environment of technology adoption, Lambrecht derived an optimal investment threshold with two symmetric R&D investors in two-stage sequential investment, and these investors with investment options have incomplete information for their own profit. In the first stage of R&D investment, investors compete for a patent that can give the holder the option to accelerate in the second phase. The second stage of R&D investment includes a commercialization process of technological invention. Studies have shown that the optimal investment trigger of the first phase is static, which means waiting for a tradeoff between investment profits and preemption cost. He analyzed the inventor has the condition of no immediate commercial patent. When interest rates are low, profit margins are high, or the first phase has less cost than the second phase, so-called sleeping patent are more likely to produce. Interesting findings are that sleeping patent and strategic trigger is a decreasing function of the profit variation. Lorenzo Garlappi[30] develop a model of a multiple-stage patent race between two rival firms to study the impact of technological competition on value and return dynamics of Research and Development (R&D) ventures. The model describes a firm's capital budgeting decision process in the presence of technical uncertainty, market uncertainty and preemption. They characterize the equilibrium of the race and derive optimal investment strategies. Analysis of the equilibrium firm value shows that the premium accruing to the technology leader is larger than the loss accruing to the technology lagger and that the marginal effect of success/failure is increasing in the uncertainty of cash flows. Risk premia demanded by an ownership claim to competing R&D ventures (i) increase when a rival pulls ahead in the race and (ii) are lower when rivals are closer to each other in the development process. Compared to the case where rival firms merge, R&D competition reduces the industry value and lowers the expected completion time for a project. The erosion in value, due to preemption, is higher when firms are neckand-neck and in early stages of development. Numerical simulations show that, in later stages of development, risk premia demanded by the perfectly collusive market are generally lower than risk premia demanded by a portfolio of

competing firms. The opposite is true in early stages of development, which suggests that R&D competition may actually lower the cost of early stage financing. In 2002, Weeds[31] considers irreversible investment in competing research projects with uncertain returns under a winner-takes-all patent system. Uncertainty takes two distinct forms: the technological success of the project is probabilistic, while the economic value of the patent to be won evolves stochastically over time. According to the theory of real options uncertainty generates an option value of delay, but with two competing firms the tear of preemption would appear to undermine this approach. In non-cooperative equilibrium two patterns of investment emerge depending on parameter values. In a preemptive leader-follower equilibrium firms invest sequentially and option values are reduced by competition. A symmetric outcome may also occur; however, in which investment is more delayed than the single-firm counterpart. Comparing this with the optimal cooperative investment pattern, investment is found to be more delayed when firms act non-cooperatively as each holds back from investing in the fear of starting a patent race. Finally, implications of the analysis for empirical and policy issues in R&D are considered. Kyle and Meng[32] use a continuous-time real-options patent-race model to study a patent-race game in which a firm with larger research bandwidth competes with a firm with smaller bandwidth. The large firm can make strategic acquisitions or investments in the small firm subject to transactions costs. Acquisitions occur when the small firm is about to make preemptive investments or the large firm has setbacks and the two firms are about to enter head-to-head competition. Strategic investments tend to occur when the smaller leader has technological setbacks. Their continuoustime approach shows that some rich strategic play can occur. Miltersen and Schwartz[33] 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 solutions 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 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. In the empirical analysis of R&D competition, Paxson and Pinto[34] apply R&D race option game model to third generation mobile option games. The third generation technology will confer to mobile phones all the capacity and speed of a fixed line phone with the additional flexibility of mobility. Major investments in 3G installation facilities are planned in developed economies; the reported investment plans indicate leader-follower patterns. Using three real

competition options models, Paxson and Pinto determine the optimal timing of 3G investment of one Portuguese mobile company, Optimus, taken as the follower. In the first of those models both the number of units sold and the cash flow perunit of the players follow separate but possibly correlated geometric Brownian motion. In the second model the investment cost and the operating cash flow are the state variables. The third model assumes that the investment cost and the operating cash flow stream of the total market follow separate geometric Brownian motion and that the market share of the follower occurs according to a Poisson process. Consistent parameters are used to derive the leader and follower value functions for different models, which are compared to a traditional NPV valuation analysis. A positive NPV points to the acceptance of the investment and the immediate entry of all of the players in the market. The results of all the models point to the delay of the entry of the follower, which might account for the observed behavior of the actual players. C. Options Game Considering the Asymmetric Information and the Agent Collaboration Applying asymmetric information into option game model is the forefront of research areas of option game theory, and in this field the research of Hsu and Lambrecht(2003) have the great significance. In the case of asymmetric information, they examine the investment behavior of an incumbent and a potential entrant that are competing for a patent with a stochastic payoff. They incorporate asymmetric information into the model by assuming that the challenger has complete information about the incumbent whereas the latter does not know the precise value of its opponents investment cost. They find that even a small probability of being preempted gives the informationally-disadvantaged firm an incentive to invest at the breakeven point where it is indifferent between investing and being preempted. By investing inefficiently early to protect its market share the incumbent gives up not only its option to delay the investment, but also reduces the value of the firm by an amount that increases with the investment cost incurred and the potential loss of market share. The investment behavior of the challenger is the same as under complete information if optimal to do so[35]. The latest development of R&D option game model includes comparative analysis of cooperative R&D strategies and non-cooperative R&D strategies. Because of the axiomatic feature of cooperative game analysis, cooperative option game model of R&D competition can also get the axiomatic equilibrium results. By considering stochastic collusion factors, Breccia and Salgado-Banda[36] analyses collusion by innovative firms and the impact of patents in a continuous-time real options framework. Generalizing earlier research by Smets and Dixit and Pindyck, a patent-investment race model is formulated in which innovative firms bargain and reach collusive agreements. It is shown that, while collusion always delays innovation, it does not necessarily delay competition. Depending on a number of factors, collusion can actually accelerate competition.

IV.

CONCLUSION

Overall, the R&D investment analysis based on option game in dynamic stochastic fields extends many well-known assertions of industrial organization theory. By contrast with previous studies, author focuses on theoretical development of R&D option game. With continuous and discrete option game R&D investment model review, we understand deeply that the principles of R&D Investment Strategies decision under uncertainty. By inductive analysis of several research papers about technology adoption and technology race, we not only obtain specialized R&D investment option game model, but also get rationally empirical evidence about R&D behavior under uncertain strategic interaction. However, because of the complexity of option game theory model, general analytical framework of R&D option game remains to be established. Writer thought that such a general framework for future research must deal with the effectiveness of modeling between uncertainty and strategic interaction, and also completely perform the essential characteristics of R&D and technological innovation. ACKNOWLEDGMENT (HEADING 5) This paper is supported by the National Nature Science Foundation of China (Serial number: 70871122) and ministry of education philosophy and the New Century Excellent Researcher Award Program from Ministry of Education of China (2009). So, we sincerely thank for their help. REFERENCES
[1] Smets, F.: Exporting versus FDI: The Effect of Uncertainty, Irreversibilities and Strategic Interactions. Working Paper, Yale University, 1991. [2] Dixit, Avinash K. and Robert S. Pindyck: Investment under Uncertainty, Princeton University Press, 1994. [3] Dixit, Avinash K. and Robert S. Pindyck: Investment under Uncertainty (Second printing), Princeton University Press, 1996. [4] Huisman, Kuno J.M. and Peter M.Kort: Strategic Investment in Technological Innovations, Working Paper, Department of Econometrics and CentER, Tilburg University, October 20, 1998. [5] Huisman, Kuno J.M. and Peter M.Kort: A Further Analysis on Strategic Timing of Adoption of New Technologies under Uncertainty, Working Paper, Department of Econometrics and CentER, Tilburg University, 1998. [6] Huisman, Kuno J.M. and Peter M.Kort: Strategic Technology Investment under Uncertainty, Working Paper, Department of Econometrics and CentER, Tilburg University, February 1, 1999. [7] Huisman, Kuno J.M. and Peter M.Kort: Effects of Strategic Interactions on the Option Value of Waiting, Working Paper, Department of Econometrics and CentER, Tilburg University, September 20, 1999. [8] Smit, Han T.J. and Ankum, L.A.: A Real Options and Game-Theoretic Approach to Corporate Investment Strategy under Competition, Financial Management, 1993, 22(3):241-250. [9] Smit H.-T.-J. & L.Trigeorgis: R&D Option Strategies, Working Paper, University of Chicago, August 1997. [10] Huisman, Kuno J.M.: Technology Investment: A Game Theoretic Real Options Approach, Kluwer Academic Publishers, 2001. [11] Boyer, Marcel, Eric Gravel & Pierre Lasserre: Real Options and Strategic Competition: A Survey, University of Montreal, Working Paper, May 2004.

[12] Yinghui An,Wei Zhang: The methods model analysis and development of option game theory, Journal of Management Science,2001,4(1) [in Chinese] [13] Shanchong Shi, Wei Zhang: Real option game investment analysis theoretical framework research, technical economy,2004(7) [in Chinese] [14] Hui Xia,Yong Zeng, Xiaowo Tang A real option method review of technology innovation strategic investment, Journal of Management Science,2004,7(1) [in Chinese] [15] Smit, Han T.J.: Infrastructure Investment as a Real Options Game: The Case of European Airport Expansion, Financial Management, 2003, 32(4):27-57. [16] Smit H.T.J. and L. Trigeorgis, 2003, Real Options: Examples and Principles of Valuation and Strategy, in Venture capital contracting and the valuation of high tech firms, Joe McCahery and Luc Renneboog (eds.), Oxford University Press. [17] Smit, Han T.J., Lenos Trigeorgis: Quantifying the Strategic Option Value of Technology Investments, Working Paper, Department of Finance, Erasmus University, Paper presented at the 8th annual conference on Real Options Theory, March 2004. [18] Smit, Han T.J., Lenos Trigeorgis: Real options and games: Competition, alliances and other applications of valuation and strategy, Working Paper, Department of Business, University of Cyprus, February 2006. [19] Grenadier, S.R., Weiss, A.M.: Investment in technological innovations: An option pricing approach. Journal of Financial Economics, 1997, vol.44, pp.397-416. [20] Kuno J.M.Huisman and Peter M.Kort: Strategic Investment in Technological Innovations, European Journal of Operational Research, 2003, 44(1): 209-223. [21] Stenbacka, R., Tombak, M.M.: Strategic timing of adoption of new technologies under uncertainty. International Journal of Industrial Organization1994, vol.12, pp.387-411. [22] Fudenberg, D. & J.Tirole: Preemption and Rent Equalization in the Adoption of New Technology, Review of Economic Studies, 1985, vol.52, pp.383-401. [23] Hoppe, Heidrun C.: Second-mover advantages in the strategic adoption of new technology under uncertainty, International Journal of Industrial Organization, 2000, vol.18, pp.315-338.

[24] Huisman, Kuno J.M. and Peter M.Kort: Strategic Technology Adoption Taking Into Account Future Technological Improvements: a Real Options Approach, Working Paper, Department of Econometrics and CentER, Tilburg University, November 2, 2000. [25] Boyer&Clamens: Strategic Adoption of a New Technology under Uncertain Implementation, mimeo, CIRANO, 1997. [26] Moretto, Michele: Irreversible Investment with Uncertainty and Strategic Behavior, Economic Modelling, 2000, vol.17, pp.589-617. [27] Mason, Robin and Helen Weeds: Networks, Options and Preemption, University of Southampton, Discussion Papers in Economics and Econometrics 41, 2000. [28] Doraszelski, Ulrich: Innovations, improvements, and the optimal adoption of new technologies, Journal of Economic Dynamics & Control, 2004, vol.28, pp.1461-1480. [29] Lambrecht, Bart: Strategic Sequential Investments and Sleeping Patents, in Project Flexibility, Agency and Competition, eds. Michael J.Brennan and Lenos Trigeorgis, 1999. [30] Garlappi, Lorenzo: Preemption Risk and the Valuation of R&D Ventures, Working Paper, The University of British Columbia, January 22, 2001. [31] Weeds, Helen: Strategic Delay in a Real Options Model of R&D Competition, Review of Economic Studies, 2002, vol.69, pp.729-747. [32] Kyle, Albert S. and Rujing Meng: Strategic Acquisitions and Investments in a Duopoly Patent Race under Uncertainty, Working Paper, Duke University, 2003. [33] Miltersen, K.R. & E.S.Schwartz: R&D Investments with Competitive Interactions, NBER Working Paper no.w10258, 2004. [34] Paxson, Dean and Helena Pinto: Third Generation Mobile Games-An application of real competition options, Working Paper, Manchester Business School, June 13, 2004. [35] Hsu, Yao-Wen and Bart M.Lambrecht: Preemptive Patenting under Uncertainty and Asymmetric Information, Working Paper, Cambridge University, February 2003. [36] Breccia, Adriana and Hector Salgado-Banda: Competing or Colluding in a Stochastic Environment, Working Paper, Birkbeck, University of London, January 2005.