Real Options and Follower Strategies: The loss of real option value to first-mover advantage

Abstract

ABSTRACT The value in real options comes from the firm's ability to wait until conditions are optimal before moving forward with a project. There may be a loss of this optimal value if decision-makers anticipate preemptive entry by a competitor. Pioneers that enter markets early might ignore or spoil the real option value from delay. Although market pioneers may gain first-mover advantages, followers have important advantages as well. In this paper we discuss these follower advantages, providing examples of successful delay in the context of a real option on innovation.