Strategic Delay in a Real Options Model of R & D Competition * Helen Weeds

When an irreversible decision is taken under uncertainty there is an option value of delay. If a small number of agents are in competition each one’s ability to delay is restricted by the fear of preemption, seeming to undermine the real options approach. We present a model in which two firms may invest in competing research projects with uncertain returns. Two distinct types of equilibria arise. In a leader-follower equilibrium option values are reduced by competition and one firm invests strictly earlier than its rival. In a symmetric equilibrium investment is more delayed compared with the single-firm counterpart, in contrast with the expected outcome. JEL classification numbers: C61, D81, L13, O32.