Analyzing The Value of Proprietary Claims Under Uncertainty: A Real Options Approach

Abstract

This paper develops and implements a general framework for evaluating proprietary claims generated by patents based on a real options approach. Our model considers both demand and competitive uncertainty as endogenous variables in the valuation process, and recognizes the interaction between the proprietary claim and the deferral and abandonment options embedded in an investment project~ We find that the acquisition of a patent enhances the value of the deferral option, but reduces the value of the abandonment option as a consequence of reduced competitive uncertainty. Although we illustrate our approach with a product launch of a new technology in the automotive industry, our model applies just as easily to any capital budgeting problem where proprietary rights play an important role.