Cumulative Leadership and Entry Dynamics

Abstract

In a continuous-time model with uncertain market development, two potential entrants detect a nascent demand only if it reaches a firm specific threshold. Entry occurs by investing irreversibly before competing in quantities. When leadership in the investment stage implies a first-mover advantage in the market stage, we examine how the firms' relative drives the equilibrium outcomes. If the firms detect the new demand relatively late, the entry strategies and resulting firm values differ qualitatively from those in standard real option games: (i) In case of symmetric detection, the probability of simultaneous entry is nonzero, and can be one, although demand is still nascent. When sequential entry occurs there is no rent equalization, with the post-entry market advantage resulting in higher equilibrium expected value to the leader; (ii) In case of asymmetric detection, entry is always sequential, and the more alert firm maximizes value by delaying its investment to enter exactly when its short-sighted rival detects demand. The marginal effect of the market advantage on the leader's equilibrium value increases in the inter-firm alertness differential; (iii) More demand volatility reduces the value differential across firms, and makes less likely the impact of imperfect alertness on entry decisions.