Real options game analysis of sleeping patents |
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Authors: | Chi Man Leung Yue Kuen Kwok |
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Institution: | (1) Faculty of Economics, University of Porto, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal |
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Abstract: | Using the real options game approach, we analyze the two-stage preemptive patent-investment race between an incumbent and
a challenger (new entrant) in a product market with profit flow uncertainty. The challenger can gain entry into the monopolized
product market dominated by the incumbent by patenting related technologies for a substitute product. To maintain its monopolized
advantage, the incumbent has an incentive to block challenger’s entry by patenting the substitute product before the challenger.
Either firm can pay an upfront fee to gain an immediate acquisition of the patent and subsequently holding the real option
to develop the new substitute product. Under our simplified real options game model, there is no potential patent litgation
risk. Also, the costs of holding the patent, like the payment of annual fees, are taken to be zero. We provide a full characterization
of the optimal strategies adopted by the incumbent and challenger firm in this asymmetric patent-investment race. In particular,
we examine the phenomena of sleeping patent, where the patented product is not launched immediately into the product market. |
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Keywords: | |
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