Patent-Investment Games Under Asymmetric Information

31 Pages Posted: 5 Jun 2010

See all articles by Chi Man Leung

Chi Man Leung

Hong Kong University of Science & Technology - Department of Mathematics

Yue Kuen Kwok

Hong Kong University of Science & Technology - Department of Mathematics

Date Written: June 4, 2010

Abstract

This paper analyzes preemptive patenting in a two-stage real options game where an incumbent firm competes with a potential entrant firm for the patent of a substitute product in a product market with profit flow uncertainty. The incumbent suffers loss of monopoly in the product market if the entrant acquires the patent of a substitute product and later commercializes the product. Our patent-investment game model assumes that the entrant has complete information on the incumbent’s commercialization cost while the incumbent only knows the distribution of the entrant’s cost. We investigate the impact of information asymmetry on the preemption strategies adopted by the two competing firms on patenting the substitute product by comparing the optimal preemption strategies and the real option value functions of the two competing firms under complete information and information asymmetry. Our analysis reveals that the informationally disadvantaged incumbent always suffers from loss in its real option value of investment since it tends to act more aggressively in competing for the patent. On the other hand, the real option value of investment of the informationally advantaged entrant may be undermined or enhanced. The incumbent’s aggressive response under information asymmetry may lead to reversal of winner in the patent race. We also examine how information asymmetry may affect the occurrence of sleeping patent and the corresponding expected duration between the two stages of patenting and product commercialization.

Keywords: Patent-Investment Models, Asymmetric Information, Real Option Games, Sleeping Patents

JEL Classification: C61, D81, G13

Suggested Citation

Leung, Chi Man and Kwok, Yue Kuen, Patent-Investment Games Under Asymmetric Information (June 4, 2010). Available at SSRN: https://ssrn.com/abstract=1620349 or http://dx.doi.org/10.2139/ssrn.1620349

Chi Man Leung

Hong Kong University of Science & Technology - Department of Mathematics ( email )

Rm. 3461, Lift 25-26
Clear Water Bay
Kowloon
Hong Kong

Yue Kuen Kwok (Contact Author)

Hong Kong University of Science & Technology - Department of Mathematics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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