Strategic Investment under Uncertainty with First- and Second-mover Advantages

Min Dai, Zhaoli Jiang and Neng Wang

No 30150, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze firm entry in a duopoly real-option game. The interaction between first- and second-mover advantages gives rise to a unique Markov subgame-perfect symmetric equilibrium, featuring state-contingent pure and mixed strategies in multiple endogenously-determined regions. In addition to the standard option-value-of-waiting region, a second waiting region arises because of the second-mover advantage. For sufficiently high market demand, waiting preserves the second-mover advantage but forgoes profits. Two disconnected mixed-strategy regions where firms enter probabilistically surface. In one such region, Leader earns monopoly rents while Follower optimally waits. Finally, when the first-mover advantage dominates the second-mover advantage, firms enter using pure strategies.

JEL-codes: E22 G13 G31 (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-bec, nep-com, nep-dem, nep-gth and nep-mac
Note: AP CF EFG IO
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