THE DYNAMICS OF REAL OPTIONS THINKING ON COMPETITION THROUGH INNOVATION: THE CASE OF THE PHARMACEUTICAL INDUSTRY

Too often, when the effectiveness of an innovation policy is examined, the uncertain nature of innovations is discarded. Through a real option lens an examination of the effectiveness becomes more sound. The real option framework allows taking on an incremental view on innovation, deriving optimal innovation strategies, and capturing the external linkages arrangements. More specific, we will show that under technical uncertainty and imperfect competition, large profit maximizing incumbents have strong incentives to encourage new innovative competitors to enter the market. Once the uncertainty is resolved, the incumbents will exercise their options, kill competition and benefit from intellectual property rights.