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Cumulative Leadership and Entry Dynamics

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  • Bruno Versaevel

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    (EMLYON RECHERCHE - EMLYON Business School, GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)

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    Abstract

    This paper investigates the combined impact of a first-mover advantage and of firms' limited mobility on the equilibrium outcomes of a continuous-time model adapted from by Boyer, Lasserre, and Moreaux (2007). Two firms face market development uncertainty and may enter by investing in lumpy capacity units. With perfect mobility, when the first entrant plays as aStackelberg leader a Markov perfect preemption equilibrium obtains in which the leader invests earlier, and the follower later, than in the Cournot benchmark scenario. There is rent equalization, and the two firms' equilibrium value is lower. This result is not robust to the introduction of firm-specific limited mobility constraints. If one firm is sufficiently less able than its rival to mobilize resources at early stages of the market development process, there is less rent dissipation, and no equalization, in a constrained preemption equilibrium. The first-mover advantage on the product market then results in more value for the less constrained firm, and in less value for the follower than when they play 'a la Cournot with perfect mobility. The leading firm maximizes value by entering immediately before its constrained rival, though later than made possible by its superior mobility. Greater uncertainty reduces the value differential to the benefit of thefollower. It also increases the distance between the firms' respective investment triggers. The specifications and results are discussed in light of recent developments in the market for music downloads.

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    Paper provided by HAL in its series Post-Print with number halshs-00371847.

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    Date of creation: 2009
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    Handle: RePEc:hal:journl:halshs-00371847

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    Keywords: Real options; Preemption; First-mover advantage; Mobility;

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    1. Nalin Kulatilaka & Enrico C. Perotti, 1998. "Strategic Growth Options," Management Science, INFORMS, INFORMS, vol. 44(8), pages 1021-1031, August.
    2. Luca Colombo & Paola Labrecciosa, 2004. "When Stackelberg and Cournot Equilibria Coincide," Trinity Economics Papers, Trinity College Dublin, Department of Economics 20043, Trinity College Dublin, Department of Economics.
    3. Boyer, Marcel & Lasserre, Pierre & Mariotti, Thomas & Moreaux, Michel, 2004. "Preemption and rent dissipation under price competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(3), pages 309-328, March.
    4. Hoppe, Heidrun C., 2000. "Second-mover advantages in the strategic adoption of new technology under uncertainty," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 18(2), pages 315-338, February.
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    7. Edward C. Prescott & Michael Visscher, 1977. "Sequential Location among Firms with Foresight," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 8(2), pages 378-393, Autumn.
    8. Driver, Ciaran & Temple, Paul & Urga, Giovanni, 2008. "Real options -- delay vs. pre-emption: Do industrial characteristics matter?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(2), pages 532-545, March.
    9. Anderson, Simon P & Engers, Maxim, 1994. "Strategic Investment and Timing of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 833-53, November.
    10. Marcel Boyer & Pierre Lasserre & Michel Moreaux, 2007. "The Dynamics of Industry Investments," CIRANO Working Papers 2007s-09, CIRANO.
    11. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1653-79, December.
    12. J.J.J. Thijssen & K.J.M. Huisman & P.M. Kort, 2003. "The Effects of Information on Strategic Investment and Welfare," Trinity Economics Papers, Trinity College Dublin, Department of Economics 200310, Trinity College Dublin, Department of Economics.
    13. Mason, Robin & Weeds, Helen, 2010. "Investment, uncertainty and pre-emption," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(3), pages 278-287, May.
    14. Anderson, Simon P. & Engers, Maxim, 1992. "Stackelberg versus Cournot oligopoly equilibrium," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(1), pages 127-135, March.
    15. Fudenberg, Drew & Tirole, Jean, 1987. "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization," American Economic Review, American Economic Association, vol. 77(2), pages 176-83, May.
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