On Strategic Investments by Leader Firms under Endogenous Entry and Quantity Competition

We consider a model where leader firms strategically use demand-enhancing investments to gain a better market position. Our setup is characterized by multiple heterogeneous leaders, free entry of followers, and quantity competition. Moreover, unlike previous studies under endogenous entry, we suppose that investments directly affect rival firms' profits. This formalizes that, all else equal, competition is tougher when goods are more appealing. By comparing the solutions of a simultaneous-moves and sequential-moves game, we show that each leader varies its investment to restrict entry of followers and increase its profit. Nonetheless, the rest of the outcomes are indeterminate. Due to this, we state conditions in terms of model primitives to ensure that leaders limit entry by investing more, and whether this increases or decreases each leader's revenue, quantity, and price. We conclude by applying our results to the case of a quality-augmented inverse CES demand.