Investment in innovations and competition: an option pricing approach

This paper applies option-based valuation to determine whether and when a firm should patent and adopt an innovation if the arrivai time of competitors is stochastic. Four distinct strategies are derived: Apply for a patent without introducing the new technology right away, patent the innovation and invest immediately, initiate the new project without patent protection, or defer the decision. It is shown how competition and the patent fee level affect the strategy to be pursued and the maximum fixed R&D expenditures.