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Endogenous Leadership in a New Market

Giovanni Maggi

RAND Journal of Economics, 1996, vol. 27, issue 4, 641-659

Abstract: In this article I analyze strategic investment under uncertainty in a new market, where firms face a tradeoff between commitment and flexibility. The model predicts asymmetric equilibria under fairly general conditions, even though firms are ex ante identical and have symmetric opportunities to enter the market. In equilibrium, one firm commits to early investment and the other firm follows a wait-and-see strategy. In the ex post outcome, firms end up with asymmetric sizes if the market profitability turns out close to, or lower than, expected; firms end up in symmetric position if the market turns out highly profitable. If uncertainty is small, the model yields (approximately) Stackelberg outcomes.

Date: 1996
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Handle: RePEc:rje:randje:v:27:y:1996:i:winter:p:641-659