Preemptive patenting under uncertainty and asymmetric information

This paper examines the investment behaviour of an incumbent and a potential entrant that are competing for a patent with a stochastic payo . We incorporate asymmetric information into the model by assuming that the challenger has complete information about the incumbent whereas the latter does not know the precise value of its opponent's investment cost. We nd that even a small probability of being preempted gives the informationally-disadvantaged rm an incentive to invest at the breakeven point where it is indi erent between investing and being preempted. By investing ine ciently early to protect its market share, the incumbent gives up not only its option to delay the investment, but also reduces the value of the rm by an amount that increases with the investment cost incurred and the potential loss of market share. The investment behaviour of the challenger is the same as under complete information, namely the challenger `epsilon preempts' the incumbent, if optimal to do...

• Type: Journal
• Year: 2007
• Where: ANOR
• Authors: Yao-Wen Hsu, Bart M. Lambrecht
• Keywords: ANOR 2007, Investment, Investment Behaviour, Market Share