Article ID: | iaor19982876 |
Country: | Netherlands |
Volume: | 20 |
Issue: | 5 |
Start Page Number: | 237 |
End Page Number: | 242 |
Publication Date: | Jun 1997 |
Journal: | Operations Research Letters |
Authors: | Zuckerman Dror, Spector Yishay |
Keywords: | competition |
In this paper we consider a stochastic R&D decision model for a single firm operating in a competitive environment. The study focuses on the firm's optimal policy which maximizes the expected discounted net return from the project. The firm's policy is composed of two ingredients: a stopping time which determines when the developed technology should be introduced and protected by a patent, and an investment strategy which specifies the expenditure rate throughout the R&D program. The main findings of the study are: (a) Under a constant expenditure rate strategy, the optimal stopping time of the project is a control limit policy of the following form: stop whenever the project's state exceeds a fixed critical value, or when a similar technology is introduced and protected by one of the firm's rivals, whichever occurs first. (b) For an R&D race model in which the winner-takes-all competition and the loser's return is zero, we show that the firm's optimal expenditure rate throughout the R&D program increases monotonically as a function of the project's state. In order to gain a better insight regarding optimal R&D programs in competitive markets we examine the effect of key economic parameters on the firm's optimal policy.