Option Games in Memorable Patent Race

• 1、School of Management, University of Electronic Science and Technology of China
• 2、School of Management，University of Electronic Science and Technology of China

Abstract：By introducing the non-homogeneous Poisson process and considering the “leaning effect” or “memorable effect” in firms’ R&D activities, this paper studies the patent race formed by two firms and a risky patent R&D project. The decision of a firm on investment timing and the memorable patent race in non-cooperative game are analyzed respectively. It is shown that the “memorable effect” results in a decrease in the firm’s investment critical value, and whether the value of the option to wait in the continuous area or the value of the project after option exercising in the stopped area is more than that in the memoryless case. Furthermore, the fact that the value of the leader always exceeds that of the follower enhances the firms’ motives to invest in preemption, and results in decreases in their critical values for investment, and finally leads to a simultaneous investment equilibrium with relatively low patent value, which would not have liked to be accepted by the two parties in the race.

Keywords： learning effect, memorable patent race, option games, simultaneous investment equilibrium