MICRO/THEORY: Strategic Investment under Uncertainty with First- and Second-mover Advantages; Professor Neng WANG (Columbia Business School)

Abstract

We analyze a duopoly entry game where firms trade off the first-mover advantage (of earning monopoly rents) against the second-mover advantage (of paying a lower entry cost) in the classic real-option framework. The equilibrium solution features five regions. There are two waiting regions: a new waiting-to-be-the-second-mover region and the standard option-value-of-waiting region. For sufficiently high market demand, there is no first-mover advantage in equilibrium as Follower immediately enters after Leader. Therefore, firms play mixed strategies and become Leader with a rate increasing in market demand, giving rise to a probabilistic entry region. For intermediate levels of market demand, firms rush to enter, giving rise to the first-mover-advantage-induced “rent-equalization” region (Fudenberg and Tirole, 1985; Grenadier, 1996). Finally, a second probabilistic entry region emerges to connect the rent-equalization region and the waiting-to-be-the-second-mover region. Quantitatively, the second-mover advantage can cause firms to significantly delay entry and substantially erode firm value.

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