Cumulative Leadership and New Market Dynamics

Two firms face market development uncertainty in a continuous-time investment model. They noncooperatively choose when to invest in a lumpy capacity before competing in the market stage. The combined impact on equilibrium outcomes of the firms’ relative ability to detect the new demand (or “alertness”, Kirzner (1973)) and of a persistent first-mover advantage is characterized. With perfect alertness, equilibrium investments are always sequential. There is rent-equalization, with even more dissipation than without a first-mover advantage, which thus reduces both firms’ ex-ante value. Limited alertness, as formalized by firm-specific investment trigger constraints, leads to qualitatively different outcomes that contrast with the known results in the literature. With nonzero probability simultaneous entry can occur, otherwise a firm maximizes value by investing late, though before its rival. A constraint level can always be defined that is so weak as to be slack in the benchmark scenario (perfect alertness and no first-mover advantage), and still result in more equilibrium value to the leader if it benefits from the market stage advantage. With more demand volatility, the impact of limited alertness on the entry sequence is less likely, and the leader-follower differential value decreases to the benefit of the less alert firm, although it enters even later. JEL classification: C73; D43; D92; L13.