Cumulative Leadership and Entry Dynamics

This paper investigates the combined impact of a first-mover advantage and of firmsí limited mobility on the equilibrium outcomes of a continuous-time model adapted from by Boyer, Lasserre, and Moreaux (2007). Two firms face market development uncertainty and may enter by investing in lumpy capacity units. With perfect mobility, when the first entrant plays as a Stackelberg leader a Markov perfect preemption equilibrium obtains in which the leader invests earlier, and the follower later, than in the Cournot benchmark scenario. There is rent equalization, and the two firmsí equilibrium value is lower. This result is not robust to the introduction of firm-specific limited mobility constraints. If one firm is sufficiently less able than its rival to mobilize resources at early stages of the market development process, there is less rent dissipation, and no equalization, in a constrained preemption equilibrium. The first-mover advantage on the product market then results in more value for the less constrained firm, and in less value for the follower than when they play `a la Cournot with perfect mobility. The leading firm maximizes value by entering immediately before its constrained rival, though later than made possible by its superior mobility. Greater uncertainty reduces the value differential to the benefit of the follower. It also increases the distance between the firmsí respective investment triggers. The specifications and results are discussed in light of recent developments in the market for music downloads.