Real options game analysis of sleeping patents

Authors: Chi Man Leung Yue Kuen Kwok

Publish Date: 2010/11/05

Volume: 34, Issue: 1, Pages: 41-65

PDF Link

Abstract

Using the real options game approach we analyze the twostage preemptive patentinvestment race between an incumbent and a challenger new entrant in a product market with profit flow uncertainty The challenger can gain entry into the monopolized product market dominated by the incumbent by patenting related technologies for a substitute product To maintain its monopolized advantage the incumbent has an incentive to block challenger’s entry by patenting the substitute product before the challenger Either firm can pay an upfront fee to gain an immediate acquisition of the patent and subsequently holding the real option to develop the new substitute product Under our simplified real options game model there is no potential patent litgation risk Also the costs of holding the patent like the payment of annual fees are taken to be zero We provide a full characterization of the optimal strategies adopted by the incumbent and challenger firm in this asymmetric patentinvestment race In particular we examine the phenomena of sleeping patent where the patented product is not launched immediately into the product market

Keywords: