Working Paper: NBER ID: w30150
Authors: Min Dai; Zhaoli Jiang; Neng Wang
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.
Keywords: strategic investment; duopoly; first mover advantage; second mover advantage; real-option game
JEL Codes: E22; G13; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| First Mover Advantage (D43) | Pure Entry Strategies (L10) |
| Second Mover Advantage (L19) | Delay Entry (Y60) |
| Market Demand (R22) | Mixed Strategies (C73) |
| Market Demand (R22) | Entry Propensity (C25) |
| First Mover Advantage Dominates (D43) | Pure Entry Strategies (L10) |
| Second Mover Advantage Dominates (L19) | Delay Entry (Y60) |
| Market Demand Increases (J23) | Entry Becomes Complex (Y20) |
| Market Demand (R22) | Probabilistic Entry (C29) |