Strategic Timing of Technological Innovation Investment under Asymmetric Duopoly: A Real Option and Game-theoretic Approach

In an asymmetric duopoly option game-theoretic framework, this paper investigates the firms’ strategic technological innovation investment under uncertainty. There exist three types of equilibria that can occur in the choice of the technological innovation investment strategies, namely the preemptive, sequential and simultaneous equilibrium. The occurrence of a particular type of equilibrium is determined by the firms’ relative payoff, which mainly depends on the level of operating cost asymmetry and first-move advantage. We show that when the asymmetry among firms is relatively small and so is the first-move advantage, the firms invest simultaneously. When the first-move advantage is significant, the low-cost firm preempts the high-cost firm. In the situation where the asymmetry between firms becomes sufficiently large, the firms invest sequentially.