A Real Option Approach To Assessment Of Patent

Enterprise has flexibility in making production decision with holding patent,namely it can decide to implement this patent technology whether or not according to market conditions. When the market conditions is favorable and putting the patent in practice can bring considerable income, enterprise will implement the patent, namely produce the products and put the products on market.Otherwise,it will wait and not implement. Consequently, with flexible decision making enterprise can avoid loss agilely.Thus,the patent is similar to call option in the financial market and can be valued with option method.In the view of systemic appraisal lacking for patent assessment with option method for the moment, the article constructs two assessment and decision-making models with real option approach. In the first model utilizing dynamic programming approach the partial differential equation to work out the value of patent and investment threshold value is deduced and numerical result is obtained by using finite difference method. The concept of technology life circle is introduced in the second model and the profit flow will not diffuse according to single geometric brownian motion.Utilizing dynamic programming approach the model calculates the patent value and investment threshold value with a backward recursive fashion.With application of the models the results reveal that along with the maturity nearby, the patent value minishes and investment threshold value increases. Sensitivity analysis indicates: Bigger drift parameter means bigger patent value and lower threshold value; Bigger uncertainty of profit flow mean bigger patent value and threshold value; More powerful competition ability of the patent product after the maturity means bigger patent value and lower threshold value. Numerical example obviously shows that the patent value is lower than the first and investment threshold value is higher when other assumptions and parameters keep invariable.Considering the variety of object property's movement form after the maturity and technology life circle,the article constructs full models with real option approach and supplies particular calculation method and program. Applying the models one can make assessment and investment decision more scientifically and conveniently.