Multi-stage product development with exploration,value-enhancing,preemptive and innovation options |
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Authors: | Nicos Koussis Spiros H Martzoukos Lenos Trigeorgis |
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Institution: | 1. Department of Economics, Accounting and Finance, Frederick University, 18 Mariou Agathagelou Str., Agios Georgios Havouzas, 3080 Limassol, Cyprus;2. Department of Public and Business Administration, University of Cyprus, P.O. Box 20537, CY 1678 Nicosia, Cyprus;3. Bank of Cyprus Chair Professor of Finance, Department of Public and Business Administration, University of Cyprus, P.O. Box 20537, CY 1678 Nicosia, Cyprus |
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Abstract: | We provide a real options framework for the analysis of product development that incorporates research and exploration actions, product attribute value-enhancing actions with uncertain outcome, as well as preemption and innovation options. We derive two-stage analytic formulas and propose a general multi-period solution using a numerical lattice approach. Our analysis reveals that exploration actions are more important when the project is out or at-the-money (near zero NPV) and less important for high project values. In a multi-stage setting, exploration actions are important even for in-the-money projects, when follow-on actions exist that can enhance the expected value of the project. With path-dependency, early actions are more valuable since they enhance the impact or reduce the cost of subsequent actions. Preemptive controls affecting rare event (jump) frequency and innovations that introduce positive jumps are more valuable for firms with higher frequency of competitive threats involving low volatility. |
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Keywords: | G13 G31 |
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