Preemptive patenting under uncertainty and asymmetric information

This paper examines the investment behaviour of an incumbent and a po tential entrant that are competing for a patent with a stochastic payo We incorporate asymmetric information into the model by assuming that the chal lenger has complete information about the incumbent whereas the latter does not know the precise value of its opponent s investment cost We nd that even a small probability of being preempted gives the informationally disadvantaged rm an incentive to invest at the breakeven point where it is indi erent between investing and being preempted By investing ine ciently early to protect its market share the incumbent gives up not only its option to delay the invest ment but also reduces the value of the rm by an amount that increases with the investment cost incurred and the potential loss of market share The invest ment behaviour of the challenger is the same as under complete information namely the challenger epsilon preempts the incumbent if optimal to do so JEL Nos D C G