Optimal Timing of Firms’ R&D Investment Under Asymmetric Duopoly: A Real Options and Game-Theoretic Approach

Abstract

In a real options and game-theoretic framework, this paper investigates the optimal timing of two asymmetric firms’ R&D investment under uncertainty. There exist three types of equilibria that can occur in the choice of the R&D investment strategies, i.e. the preemptive, sequential and simultaneous equilibrium. The occurrence of a particular type of equilibrium is determined by the firms’ relative payoff, which mainly depends on the level of operating cost asymmetry and first-mover advantage and the operating cost itself. We show that when the cost asymmetry and the first-mover advantage among firms are relatively small, two firms invest simultaneously. When the first-mover advantage is significant, the low-cost firm preempts the high-cost firm. In the situation where the asymmetry between firms becomes large enough, two firms invest sequentially. We also show that the lower the operating cost is, the more the incentive to become the leader has. So, with the operating cost decreasing, the possibility of simultaneous equilibrium and sequential equilibrium decreases, but that of preemptive equilibrium increases.