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.     

基于成本差异的最佳贸易与产业政策选择

本文讨论了存在成本差异的第三国市场模型的最佳贸易与产业政策选择问题，讨论了社会成本和私人成本、本国和外国成本差异情况下的Cournot竞争和Bertrand竞争的情况。本文发现，在Cournot竞争下，政府首先行动时，当政府基金影子价格低于4／3时，政府对出口进行补贴，并且本国越有成本优势，补贴越高，补贴的利润转移效应越大；当政府基金影子价格高于4／3时，政府对出口征收出口税，且本国越有成本优势，征税越多。在Bertrand竞争下，当政府先行动时，对出口征收出口税；当政府后行动时，对出口进行补贴。当本国企业具有劣势时，事后补贴是最佳政蓑。     

供应商参与产品创新的供应链协调研究

考虑供应商对产品创新的投入会影响未来需求,分析了初始需求为确定型和随机型两种情况下,供应商的最优创新投入策略和制造商的最优订货策略,给出了实现供应链协调的条件。研究表明,在确定初始需求下,要实现供应链的协调,只需要制造商给予创新失败的供应商一定的创新补贴;而在随机初始需求下,创新补贴与其他机制同时使用才能实现供应链协调。     

Hedging to market-wide shocks and competitive selection

This paper examines hedging against a large market-wide shock in a model with heterogeneous firms and sunk costs of entry. If hedging is voluntary only the most efficient firms hedge against this shock, a finding in line with empirical evidence but at odds with standard motivations for risk management. Hedging affects the critical level of the marginal cost needed to operate in the market. A setting with mandatory hedging is associated with stronger competition than when hedging is voluntary which, in turn, is associated with stronger competition than when hedging is unavailable.     

Optimal capital accumulation under price uncertainty and costly reversibility

We consider the optimal capital accumulation policy of a competitive firm operating in the presence of decreasing returns to scale, price uncertainty, and costly reversibility of investment. We characterize the optimal accumulation policy and derive the value of the firm by focusing on the marginal investment decision and solving the associated optimal timing problem characterizing the option value of the associated opportunity to either disinvest or acquire a marginal unit of capacity. We also characterize the required exercise premia associated with the optimal policies and demonstrate that hysteresis prevails within this class of accumulation problems as well.     

The influence of performance feedback frequency and affective commitment on the sunk cost effect

The purpose of this study is to explore how combined effect of feedback frequency of investment performance and manager's affective commitment on reduction of the sunk cost effect. To this end, we designed an experimental questionnaire to collect data from production managers of electronics manufacturing companies listed on Taiwanese stock markets and used a hierarchical regression model to examine the relationships among variables. The results from 336 samples showed that just considering performance feedback frequency or affective commitment does not necessarily reduce the sunk cost effect. Only high feedback frequency jointed with high affective commitment can suppress the willingness of manager to continue a disadvantageous investment project.     

不确定条件下环境政策的时机选择

本文建立了一个连续时间模型，用于分析不确定条件下环境政策的时机选择。模型结果显示，环境政策的采用有两种不可逆性，而且它们在相反的方向上起作用：第一，旨在降低生态危害的政策对社会施加了沉淀成本。它产生立即采用这一政策而不是等待有关生态影响及其经济后果的更多信息的机会成本，这种机会成本使等待而不是现在就采纳政策更可取；第二，环境危害可能部分或完全不可逆。这就意味着立即采用一项政策而不是等待具有沉没收益，即负的机会成本。这种负的机会成本偏离了政策采用中传统的成本一收益分析。因此，现在立即采用一项政策可能是更合适的，即使传统的分析宣称它是不经济的。文章表明，不确定性对环境政策的时机选择有着重要的影响。     

Macroeconomic conditions and investment stimuli

Based on a calibrated real options model, this paper examines a tax-subsidy program offered by a government to stimulate corporate investment under business cycles. We derive and discuss optimal incentive policies for different states of the economy. We find that it is optimal for the government to offer a combination of tax cuts and lump-sum subsidy for stimulating levered firms’ investment under business cycles. Furthermore, the government should adopt counter-cyclical tax-subsidy policy, namely a higher (lower) tax cuts and a larger (smaller) lump-sum subsidy during recessions (booms). In particular, we provide a possible explanation why many governments around the world have reduced and even implemented negative interest rates to stimulate the economy during the COVID-19 pandemic in 2020. Finally, our conclusions also predict that the break-even tax-subsidy program always provides effective investment stimulus under business cycles.     

On the dynamic response of a firm to an employment subsidy with a fmd threshold

During the last two decades, policy-makers have included employment subsidies among the tools of stabilization policy. Employment subsidy programs have been introduced in Japan, Great Britain, Europe and the United States. There has been some concern, however, about the effectiveness of such programs. In this paper, we analyze how a profit-maximizing firm will respond to a marginal subsidy program with a fixed threshold, focusing on the role of inventories. We show that, in some cases, the firm may have an incentive to manipulate inventories in a way that increases its profits but lowers the cost effectiveness of the program.     

Bank equity and macroprudential policy

This paper proposes an alternative macroprudential policy in the framework of Gertler et al. (2012). In their model, the central bank subsidizes bank outside equity, where the subsidy rate is determined by the shadow cost of the deposit. We find that the alternative rule in which the subsidy rate responds to the aggregate bank outside equity ratio is welfare improving because it has a better stabilization effect on the bank asset deterioration after a financial shock. We disentangle different channels through which macroprudential policies affect the economy and demonstrate that the better stabilization in the post-crisis economy has a positive effect on the economy in normal times through security prices.     

Investments in flexible production capacity

We examine the technology and capacity choice problem of a multi-output firm facing stochastic demands in a continuous-time framework. The firm can install output-specific capital, or, at greater cost, flexible capital that can be used to produce different outputs. Investment is irreversible. The firm must choose a technology and decide how much capital to install, knowing it can add more later as demand evolves. We formulate the capacity choice problem as a singular stochastic control problem, show that the value of the firm equals the value of its installed capital plus the value of its options to add capacity in the future, and derive an optimal investment rule that maximizes the firm's market value. We also address the analogous problem for a multi-input firm that faces stochastically evolving factor costs, and can install input-specific or flexible capital.     

Are Sunk Costs a Barrier to Entry?

The received wisdom is that sunk costs create a barrier to entry—if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.     

Environmental regulations in private and mixed duopolies: Taxes on emissions versus green R&D subsidies

In this article, we compare two kinds of environmental regulations—emissions taxes and green R&D subsidies—in private and mixed-duopoly markets in the presence of R&D spillovers. We show that a green R&D subsidy is better (worse) than an emissions tax when the green R&D is efficient (inefficient), irrespective of R&D spillovers, whereas the existence of a publicly owned firm encourages the government to adopt a subsidy policy. We also show that the optimal policy choice depends on R&D efficiency and spillovers. In particular, when green R&D is inefficient and the spillover rate is low (high), the government should choose an emissions tax and (not) privatize the state-owned firm. When green R&D is efficient, however, an R&D subsidy is better, but a privatization policy is not desirable for society, irrespective of spillovers.     

Timing of investment under technological and revenue-related uncertainties

The effects of two forms of uncertainty on the timing of irreversible investment are considered. Technological uncertainty is modeled as a Poisson arrival process that reduces the cost of investment, while revenue uncertainty is modeled as a diffusion process. Technological uncertainty has no effect on the optimal investment policy when revenue uncertainty is absent. However, when combined with revenue uncertainty, increased technological uncertainty makes investment less attractive relative to waiting. The paper also makes a more general point in clarifying the difference in how diffusion type of uncertainty and unidirectional stochastic progress affect investment timing.     

Winner Take All: Competition, Strategy, and the Structure of Returns in the Internet Economy

In this paper, we develop an economic rationale for the following stylized fact: Web-based firms spend profligately on advertising and marketing and usually lose money. Our rationale is based on the winner-take-all structure of high fixed cost, low marginal cost, markets for information goods. This market structure ensures that market participation and investment policy are highly stochastic. Moreover, if a firm chooses to participate in a Web market, it is optimal to act very aggressively through saturation advertising. Although increases in advertising costs reduce the probability of entry, once the decision to enter is made, firm strategies are insensitive to advertising price. Consistent with empirical studies of the profitability of internet firms ( Hand, 2001 ), our model predicts returns that are highly positively skewed, that is, even the firms that survive the competition for market position have a small chance of huge gains combined with a large probability of very modest returns. In dynamic competition, firms weakened by early rounds are less likely to challenge in subsequent rounds. However, when a challenge is attempted, it is always aggressive. In addition, because large expenditures in the first period produce valuable strategic real options in later periods, which are treated as expenses using traditional accounting methodology, the financial valuation of Internet firms may actually be negatively related to performance when using standard accounting measures of profitability that fail to capitalize these strategic real options.     

Fiscal policy,entry and capital accumulation: Hump-shaped responses

In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum effect after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.     

A contingent claims analysis of optimal investment subsidy

This paper uses contingent claims analysis to answer two questions: (i) why are some subsidy markets apparently slow in attracting an optimal subsidy when others are not, and (ii) what can be done about it? The lack of activity in the green investment subsidy markets has been a concern as it appears optimal that countries should offer such support from a welfare point of view but progress has nonetheless been stalling, which motivates this paper. We show that free riding (which is likely to affect the green subsidy market) cools down the subsidy market with harmful welfare effects, and preemption (which is likely to affect the more active FDI subsidy market) overheats the subsidy market with similarly harmful effects. The theory dictates a taxation scheme that offsets these effects to restore the welfare to its maximum point.     

城市公交成品油价格补助政策浅析

为消化油价调整给公交行业带来的成本负担,国家于2006年开始出台了一系列成品油价格补助政策,给予城市公交企业成品油价格补助。本文根据成品油价格补助政策产生的原因及现状,分析目前成品油价格补助政策存在的问题,并为成品油价格补助政策的有效实施提出建议。     

To lead or to wait? An application to internationalization strategies under demand uncertainty

We examine the exports versus foreign direct investment (FDI) decision under demand uncertainty for an asymmetric cost duopoly. One of the firms can lead entry before demand realization or retain flexibility enjoying an informational advantage. When the time value of information is small and for sufficiently low investment costs, follow‐the‐leader behavior in FDI arises. Relatively high investment (fixed) costs result in follow‐the‐leader exporting behavior. When the time value of information becomes significant, the potential leader will opt for a wait‐and‐see strategy. For intermediate values of investment costs, the efficient firm invests, while the rival chooses to export.     

Auctions with endogenous participation

We study endogenous-participation auctions where bidders only know the number of potential participants. After seeing their values for the object, potential participants decide whether or not to enter the auction. They may not want to enter the auction since they have to pay participation costs. We characterize equilibrium bidding strategies and entry decisions for both first- and second-price sealed-bid auctions when participation is endogenous. We show that there is a pure strategy entry equilibrium where only bidders with values greater than a certain cut-off point actually bid. In this context, both types of auctions generate the same expected revenue. We also show that, contrary to the predictions of the fixed number of bidders literature, the seller's expected revenue may decrease when the number of potential participants increases. In addition, we show that it is optimal for the seller to charge an entry fee, which contrasts with results from the existing literature on auctions with entry. As in the fixed-n literature, we show that first-price auctions generate more expected revenue than second-price auctions when buyers are risk-averse. Finally, we characterize the optimal auction – the auction that maximizes the seller's expected revenue – by using a direct revelation mechanism. The optimal auction involves a reserve price larger than the optimal reserve price in the fixed-n literature. The winner's payment is the second highest bid less the participation cost and losers receive a subsidy equal to the participation cost. Received: 17 August 1998 / 21 September 1999