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Preempting an Alert Rival: Strategic Timing of the First Plant by Analysis of Sophisticated Rivalry

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  • Ram C. Rao
  • David P. Rutenberg

Abstract

This paper examines the strategic rivalry in a duopoly where firms must correctly time the construction of the first plant in a growing market. We explicitly model rivalry for market share. Firms recognize the effect of the rival's actions on their profits; they behave noncooperatively to maximize discounted profits over the infinite horizon. For the timing problem we develop an appropriate solution concept. It is a Nash equilibrium in the space of sequential decision rules which specify each firm's correct action as a function of the state of the world. We then show how the equilibrium can be computed by backward induction dynamic programming. Numerical examples illustrate the sequential Nash solution and characterize the rivalry to be the first to build. Parametric analysis of the example enables us to explore the competitive dynamics of capacity choice in new markets.

Suggested Citation

  • Ram C. Rao & David P. Rutenberg, 1979. "Preempting an Alert Rival: Strategic Timing of the First Plant by Analysis of Sophisticated Rivalry," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 412-428, Autumn.
    • Handle: RePEc:rje:bellje:v:10:y:1979:i:autumn:p:412-428
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    Cited by:

    1. Sébastien Liarte, 2004. "La localisation comme mouvement concurrentiel : quelle stratégie spatiale pour le nouvel entrant?," Revue Finance Contrôle Stratégie, revues.org, vol. 7(4), pages 167-192, December.
    2. S Finne & R Laulajainen, 1992. "Gaming in Spatial Expansion Tracks: The Case of the Swedish Brewery Industry," Environment and Planning A, , vol. 24(7), pages 1021-1037, July.
    3. D. Santos-Peñate & R. Suárez-Vega & P. Dorta-González, 2007. "The Leader–Follower Location Model," Networks and Spatial Economics, Springer, vol. 7(1), pages 45-61, March.
    4. Tombak, Mihkel M., 1995. "Multinational plant location as a game of timing," European Journal of Operational Research, Elsevier, vol. 86(3), pages 434-451, November.
    5. Jason R. Blevins & Ahmed Khwaja & Nathan Yang, 2018. "Firm Expansion, Size Spillovers, and Market Dominance in Retail Chain Dynamics," Management Science, INFORMS, vol. 64(9), pages 4070-4093.
    6. Rhee, Byong-Duk, 2006. "First-mover disadvantages with idiosyncratic consumer tastes along unobservable characteristics," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 99-117, January.
    7. Bergman, Mats A., 1998. "Endogenous Timing of Investments Yields Modified Stackelberg Outcomes," SSE/EFI Working Paper Series in Economics and Finance 272, Stockholm School of Economics.
    8. Hao Zhao, 2003. "R&D Competition Between an Incumbent and an Entrant: An Integrated Model of R&D Investment, Performance Improvement, and Time-to-Market," Review of Marketing Science Working Papers 2-2-1023, Berkeley Electronic Press.
    9. Zhou, Dongsheng & Vertinsky, Ilan, 2001. "Strategic location decisions in a growing market," Regional Science and Urban Economics, Elsevier, vol. 31(5), pages 523-533, September.

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