Real options game analysis of sleeping patents

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.     

Is Privately‐provided Electronic Money Next?

To survive, any new electronic money will need to provide some advantage to its users, such as lower transaction costs, increased privacy, a greater ability to avoid taxes, or a more stable value than its government-provided competitors. Any successful new money will have to overcome substantial barriers to entry, however. These barriers to entry occur primarily in the form of the costs of switching to a different means of payment and require an understanding of the role played by 'network economics.' Unless a substantial number of the individuals and businesses with whom a person trades use the same money, any new means of payment will have little value. A temptation facing government regulators will be to extend and expand regulations to apply to new means of payment and forms of money. A more productive role of governments is to attempt to protect their own money-creation franchises by minimising the advantages offered by privately-provided alternatives. Governments should enforce contracts and punish fraud while remaining vigilant with respect to inflation, keep tax rates low and protect the privacy of their citizens.     

The pace of intermediate‐product introductions

This paper models frequency of introductions of newer generations of an intermediate‐product sold by an upstream ‘developer’ firm to downstream manufacturer firms. The manufacturers use the intermediate product to manufacture final products, and are heterogeneous in the time it takes them to develop and introduce final products based on the latest generation of the intermediate product. This downstream heterogeneity could arise, for example, from heterogeneity in manufacturers' technical skills or existing patent regimes. Among other results, we show that the optimal frequency of introduction of the intermediate‐product can increase or decrease in the extent of this downstream heterogeneity. Copyright © 2006 John Wiley & Sons, Ltd.     

Subjective performance of patent examiners,implicit contracts,and self‐funded patent offices

Self‐funded patent offices should be concerned with patent quality (patents should be granted to only deserving innovations) and quantity (as revenues come from fees paid by applicants). In this context, we investigate what is the impact of the self‐funded constraint on different bonus contracts and how these contracts affect the examiners' incentive to prosecute patent applications. We consider contracts in which a patent office offers bonuses on quantity quotas (explicit contract) and on quality outcome (either an implicit contract or an explicit contract based on a quality proxy). We find that a self‐funded constrained agency should make different organization choices of incentives. For a low quality proxy precision, an agency facing a tight budget operates well with implicit contracts. However, by only relaxing moderately the budget constraint, the agency might be worse off simply because this will preclude implicit contracts. Only very large patenting fees might allow the agency to compensate for the loss of implicit contracts.     

Entry threat,entry delay,and Internet speed: The timing of the U.S. broadband rollout

In a rapidly growing industry, potential entrants strategically choose which local markets to enter. Facing the threat of additional entrants, a potential entrant may lower its expectation of future profits and delay entry into a local market, or it may accelerate entry due to preemptive motives. Using the evolution of local market structures of broadband Internet service providers from 1999 to 2007, we find that the former effect dominates the latter after allowing for spatial correlation across markets and accounting for endogenous market structure. On average, it takes 2 years longer for threatened markets to receive their first broadband entrant. Moreover, this entry delay has long‐run negative implications for the divergence of the U.S. broadband infrastructure: 1 year of entry delay translates into an 11% decrease on average present‐day download speeds.     

Optimal Two‐part Pricing under Cost Uncertainty

This paper examines the optimal two‐part pricing under cost uncertainty. We consider a risk‐averse monopolistic firm that is subject to a cost shock to its constant marginal cost of production. The firm uses two‐part pricing to sell its output to a continuum of heterogeneous consumers. We show that the global and marginal effects of risk aversion on the firm's optimal two‐part pricing are to raise the unit price and lower the fixed payment. We further show that an increase in the fixed cost of production induces the firm to raise (lower) the unit price and lower (raise) the fixed payment under decreasing (increasing) absolute risk aversion. The firm's optimal two‐part pricing is unaffected by changes in the fixed cost under constant absolute risk aversion. Finally, we show that a mean‐preserving spread increase in cost uncertainty induces the firm to raise the unit price and lower the fixed payment under either decreasing or constant absolute risk aversion. Copyright © 2011 John Wiley & Sons, Ltd.     

Little Firms and Big Patents: A Model of Small‐Firm Patent Signaling

Patent strategies of small technology‐intensive firms are difficult to explain with standard incentive arguments based on intellectual property rights. This paper develops a rationale for patent filing as a disclosure strategy. We develop a two‐sender signaling game to study patenting incentives of two technology start‐ups to file in a large‐scale patent system with the goal to attract a user firm. Both start‐ups may decide to invest in costly modification of their patent application before filing. The paper identifies a separating equilibrium in which the high‐quality inventor files and so separates from its technology competitor. Of particular interest is the study of pooling and semi‐separating equilibria, as well as the impact of subsidies. We find that a higher quality of a country's inventions, reflected in the possible innovative steps and thus in higher expected profits for foreign user firms, may increase the chance of the relatively lower‐quality inventor to enter international technology markets.     

Idiosyncratic deals and work‐to‐family conflict and enrichment: The mediating roles of fit perceptions and efficacy beliefs

Idiosyncratic deals (i‐deals), which involve personalised work arrangements negotiated between employees and their managers, offer a promising approach to accommodating the demands of a diverse workforce. In contrast with the traditional social exchange theory perspective, we integrate the theories of person–environment fit and self‐efficacy to examine the effect of flexibility i‐deals on both work‐to‐family conflict and enrichment. We specifically consider two mediating mechanisms: needs–supplies (N‐S) fit and family‐role efficacy. Results from two Chinese samples reveal that supervisor‐rated flexibility i‐deals relate positively with employees' family‐role efficacy and N‐S fit. These, in turn, relate to work‐to‐family conflict negatively and to work‐to‐family enrichment positively. Monte Carlo bootstrapping analyses confirm the indirect effects of N‐S fit and family‐role efficacy. By using an alternative theoretical perspective, we add to our understanding of the mechanisms underlying the i‐deals effect. This study expands existing i‐deals research to an empirically underrepresented area: work–family enrichment. Our findings also confirm the work–family benefits of i‐deals and strengthen managers' confidence regarding the merits of implementing i‐deals in the workplace.     

Quality competition and entry deterrence: When to launch a second brand

We study the rationale for an incumbent to launch a second brand when facing potential entry into a market with quality‐differentiated products and a fringe producer. Depending on market size, the cost of a second brand and a potential entrant's setup cost the incumbent might use a second brand both when deterring and when accommodating entry. For low costs of brand proliferation, the high‐quality firm will prevent entry with limit qualities or multiple brands. The high‐quality incumbent will accommodate entry only if it cannot be prevented. Accommodation is always accompanied by an additional brand safeguarding the premium brand.     

The Profit‐Maximizing Case for Corporate Social Responsibility in a Bilateral Monopoly

We analyze a stylized distribution channel (bilateral monopoly) model where an upstream manufacturer sells output to a downstream retailer. In a two‐stage linear demand game setting, we show that a two‐part contract, consisting of a wholesale price and corporate social responsibility (CSR) component, can be utilized by the manufacturer to fully coordinate and control its retailer. Thus, a CSR contract can be used in place of the traditional two‐part tariff scheme (wholesale price and fixed franchise fee) to optimally coordinate the marketing channel. Our model provides a novel theoretical profit‐maximizing rationale for the strategic use of CSR. Copyright © 2013 John Wiley & Sons, Ltd.     

Coupons and price discrimination in vertically‐correlated markets

This research analyzes the non‐cooperative and cooperative strategies with respect to manufacturer and retailer coupons. In a model with one manufacturer selling its product to one retailer, it is found that the retailer can achieve third‐degree price discrimination equilibrium in retail markets by issuing coupons to demanders with higher elasticity. Although facing only one retailer, the manufacturer can also achieve the same third‐degree price discrimination equilibrium by issuing coupons directly to demanders of higher elasticity. However, when only one firm issues the coupon, both manufacturer and retailer coupons can help alleviate the channel profit loss due to double marginalization. If the manufacturer and the retailer non‐cooperatively issue coupons, then the subgame‐perfect Nash equilibrium outcomes are equivalent to those under the successive third‐degree price discrimination. Moreover, cooperative strategies between the manufacturer and the retailer can eliminate double marginalization, achieve the vertical integration effect, and lead to higher profits, consumer surpluses, and social surpluses than non‐cooperative coupon strategies. Copyright © 2004 John Wiley & Sons, Ltd.     

Real options game models of R&D competition between asymmetric firms with spillovers

Using real options game models, we consider the characterization of strategic equilibria associated with an asymmetric Research and Development (R&D) race between an incumbent firm and an entrant firm in the development of a new innovative product under market and technological uncertainties. The random arrival time of the discovery of the patent protected innovative product is modeled as a Poisson process. Input spillovers on the R&D effort are modeled by the change in the leader’s hazard rate of success of innovation upon the follower’s entry into the R&D race. Asymmetry between the two competing firms include sunk costs of investment, stochastic revenue flow rates generated from the product, and hazard rates of arrival of success of R&D efforts of the two firms. Under asymmetric duopoly, we obtain the complete characterization of the three types of Markov perfect equilibria (sequential leader–follower, preemption and simultaneous entry) of the firms’ optimal R&D entry decisions with respect to various sets of model parameters. Our model shows that under positive input spillover, preemptive equilibrium does not occur in the R&D race due to the presence of dominant second mover advantage. The two firms choose optimally to enter simultaneously if the sunk cost asymmetry is relatively small; otherwise, sequential equilibrium would occur. When the initial hazard rate is low relative to the level of input spillover, simultaneous entry would occur as an optimal decision, signifying another scenario of dominant second mover advantage. On the other hand, when the initial hazard rate is sufficiently high so that the first mover advantage becomes more significant, simultaneous equilibrium does not occur even under high level of positive input spillover.     

Factor market rivalry and interindustry competitive dynamics

We study competitive dynamics by using 10 years of data from the biotech industry on patent infringement lawsuits because they capture offensive actions and defensive responses. Results suggest that larger patent portfolios, long‐term partnerships, and short‐term agreements lead to factor market rivalry. Specifically, long‐term research partnerships are associated with lower proclivity and vulnerability to attack, while short‐term licensing and marketing agreements with increased proclivity and vulnerability to attack. Lastly, although nonbiotech companies attack biotech firms, the proclivity of the latter to launch cross‐industry attacks is not significant. We discuss how the results contribute to competitive dynamics research and theory.     

Labor market entry and earnings dynamics: Bayesian inference using mixtures‐of‐experts Markov chain clustering

This paper analyzes patterns in the earnings development of young labor market entrants over their life cycle. We identify four distinctly different types of transition patterns between discrete earnings states in a large administrative dataset. Further, we investigate the effects of labor market conditions at the time of entry on the probability of belonging to each transition type. To estimate our statistical model we use a model‐based clustering approach. The statistical challenge in our application comes from the difficulty in extending distance‐based clustering approaches to the problem of identifying groups of similar time series in a panel of discrete‐valued time series. We use Markov chain clustering, which is an approach for clustering discrete‐valued time series obtained by observing a categorical variable with several states. This method is based on finite mixtures of first‐order time‐homogeneous Markov chain models. In order to analyze group membership we present an extension to this approach by formulating a probabilistic model for the latent group indicators within the Bayesian classification rule using a multinomial logit model. Copyright © 2011 John Wiley & Sons, Ltd.     

Motivating Employees to Work Beyond Retirement: A Multi‐Level Study of the Role of I‐Deals and Unit Climate

The present study investigates what role I‐deals (i.e. the idiosyncratic deals made between employees and their organization) play in the motivation of employees to continue working after retirement. We hypothesized two types of I‐deals (i.e. development and flexibility I‐deals) to be positively related to motivation to continue working. More specifically, we drew from continuity and personality theory to argue that the motivation to continue working is enhanced by I‐deals, because they fulfil people's needs for personalized work arrangements. Moreover, drawing from activity and disengagement theory it was hypothesized that two types of unit climate (i.e. accommodative and development climates) would moderate these relationships. Specifically, it was predicted that I‐deals would be positively related to motivation to continue working under conditions of low accommodative or high development climate. Results of a multi‐level study among 1083 employees in 24 units largely supported the above expectations; flexibility I‐deals related positively to motivation to continue working, and unit climate moderated the relation between development I‐deals and motivation to continue working.     

The Construction of a Low‐Cost Airline Network – Facing Competition and Exploring New Markets

The paper investigates the construction of a low‐cost airline network by analyzing JetBlue Airways' entry decisions into non‐stop domestic US airport‐pair markets. Adopting duration models, we find that JetBlue consistently avoided concentrated airports and targeted concentrated routes; network economies also affected entry positively. For non‐stop entry into routes that have not been served directly before, our analysis reveals that the carrier focused on thicker routes and secondary airports. Non‐stop entry into existing non‐stop markets, however, shows that JetBlue concentrated on longer‐haul markets and avoided routes already operated by either other low‐cost carriers or network carriers under bankruptcy protection. Copyright © 2012 John Wiley & Sons, Ltd.     

Pharmaceutical Regulation and Innovative Performance: A Decision‐theoretic Model

In this paper, we develop a model of the impact of the drug approval process on the terms of a contract between a pharmaceutical company that requires the services of a contract research organization (CRO) to carry out testing of new drug molecules. Results show that if the equilibrium contract includes a variable payment (royalty), the more effort the CRO gives to create a more accurate result, the more strict the Food and Drug Administration (FDA) approval process. We also find that given the royalty shares in the contract, if the FDA demands more accuracy in results as a condition of approval, then the CRO will generate more accurate results from late‐stage tests. However, greater FDA stringency in the approval process benefits pharmaceutical companies because the greater is FDA stringency, the less is the risk of a drug recall. We also find that in order to employ a CRO in the testing process, the pharmaceutical company's prior probability that the drug is of high quality must be very high. Copyright © 2014 John Wiley & Sons, Ltd.     

Career Management in High‐Performing Organizations: A Set‐Theoretic Approach

The aim of this study is to investigate the elements of organizational career management (OCM) that can lead to strong organizational performance. The growing unpredictability of careers requires a different organizational approach of careers. Yet, new career models all focus on the individual as the central actor, leaving the role of the organization rather underdeveloped. Based on a combined perspective integrating insights from the literature on careers, high performance work systems, and idiosyncratic deals (I‐deals), we address four dimensions of OCM: supportive and developmental practices, development I‐deals, individual responsibility, and consensus. We study their relationships with company performance, thereby including the firm's human capital composition. Surveys were administered to the HR directors of 293 organizations. We apply a relatively new method, fsQCA (fuzzy‐set qualitative comparative analysis), and complement this with more conventional structural equation modeling (SEM). The SEM analyses suggest that only supportive and developmental practices are positively associated with high performance. However, based on the fsQCA, three configurations are identified in which OCM is associated with high performance. The most prevalent configuration combined supportive and developmental practices with I‐deals and individual responsibility for career management. We conclude with a discussion of the implications of our findings, and address the utility of adopting a configurational approach in career research. © 2016 Wiley Periodicals, Inc.     

Learning remotely: R&D satellites,intra‐firm linkages,and knowledge sourcing

Firms venture abroad not only to access resources and markets but also to learn. Yet there remains limited empirical evidence that headquarters can access geographically remote knowledge by establishing a presence in the remote location. Using U.S. patent data, I show that firm headquarters disproportionately source knowledge from third parties in remote locations where they have an R&D satellite. This “satellite effect” on knowledge flow is economically significant, representing up to 60% of the knowledge‐flow premium associated with collocation. Furthermore, the effect seems to be stronger for recent knowledge, as well as in areas of satellite technological specialization, suggesting that firms can target cutting‐edge knowledge in specific sectors. In addition, the results show that firms with stronger internal linkages between headquarters and satellites, and those that staff satellites with inventors that previously patented while at other local firms, experience a larger satellite effect on knowledge acquisition.