First-movers, non-movers, and social gains from subsidising entry in markets for nature-based recreational goods

The importance of ecosystem services for mankind stresses the issue of identifying different institutional solutions to effectively secure their adequate provision. Much focus has been on services of the public good type, and instruments like payments for environmental services. We extend this work to consider the possible social gains from supporting development of new markets for nature-based recreational goods, which may alleviate negative externalities caused by congestion problems. Our three main questions are: i) Why is there a lack of market development? ii) Can there be social gains from intervention and supporting the development of such markets? And iii) if so, then how could such intervention be best performed? We use a two-stage non-cooperative Bayesian simultaneous-move game model and show that in spite of apparent potential first-mover advantages in a developing market, demand uncertainty and sunk costs may equally well result in widespread presence of non-movers on the supplier side. We show that social gains can be made from offering a subsidy towards the sunk costs. Analysing three possible subsidy schemes, we show a) that fixed costs may make rationing optimal, b) that sequential rationing does not necessarily dominate strict rationing because c) the more subsidies are offered, the larger each subsidy must be to induce participation, and that d) the longer a single agent on the market may keep market information to himself, the better a non-rationing scheme will perform relative to rationing schemes. Finally, e) subsidies for second-mover entry may be optimal in some cases.