Patent-investment races and sleeping patents

Using the real game option approach, we analyze the two-stage pre-emptive patent-investment race between an incumbent and a chal-lenger (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 in-cumbent 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. We provide a full characterization of the optimal strate-gies adopted by the incumbent and challenger firm in this asymmetric patent-investment race. In particular, we examine the phenomena of sleeping patent, where the patented product is not launched immedi-ately into the product market