Strategic R&D investment: A game theoretic real options approach

This paper applies the theory of option games to discuss the strategic decision rules in corporate R&D investment under uncertainty and competition, with three uncertainties in terms of income, cost and technology considered. The results show that there exist both preemptive equilibrium and simultaneous equilibrium in R&D investment game and exists mixed strategy equilibrium in preemptive equilibrium; and the increase of uncertainty is not always to rise the optimal threshold when considering many uncertain factors which are correlative; reversely, the increase of correlation and hazard rate of R&D technology will minish the threshold. Our analytical result in theory is further verified and enriched by a numerical example at last.