We examine innovation as a timing game with complete information and observable actions in which firms decide when to enter a market. We characterize all pure strategy subgame perfect equilibria for the two-player symmetric game. In particular, we describe all subgame perfect equilibria when both the leader's and the followers' payoff functions are multi-peaked, non-monotonic and discontinuous. We find that there are potentially multiple equilibria, which could involve: joint adoption by both firms, with and without rent equalization; and, alternatively, single-firm adoption with a second-mover advantage. Economic applications are discussed including process and product innovation and the timing of the sale of an asset.
We explore the holdup problem when trading parties can make specific investments simultaneously or sequentially. As previously emphasized in the literature, sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime. This is not always the case, however. A cost of sequencing investment is that it can disadvantage some parties, reducing their incentive to invest. The mere possibility of sequential investment can be detrimental to welfare; it can even prevent trade from occurring. This is a new result: it allows the choice about the timing of investment to be interpreted as a new form of holdup. We also examine an investment game in which both parties would prefer to invest second (follow) rather than lead. This game displays some interesting dynamics. As the the number of potential investment periods is increased, the subgame perfect equilibrium can switch between a prisoners' dilemma and a coordination game.
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