CLUSTERING INN-PLAYER PREEMPTION GAMES

Abstract

We study a complete information preemption game in continuous time. A finite number of firms decide when to make an irreversible, observable investment. Upon investment, a firm receives flow profits, which decrease in the number of firms that have invested. The cost of investment declines over time exogenously. We characterize the subgame-perfect equilibrium outcome, which is unique up to a permutation of players. When the preemption race among late investors is sufficiently intense, the preemption incentive for earlier investors disappears, and two or more investments occur at the same time. We identify a sufficient condition in terms of model parameters: clustering of investments occurs if the flow profits from consecutive investments are sufficiently close. This shows how clustering can occur in the absence of coordination failures, informational spillovers, or positive payoff externalities.

Timing of entry and location/product differentiation

“…Following Dutta et al . (), Hoppe and Lehmann‐Grube (), and Argenziano and Schmidt‐Dengler (), we introduce a randomization device in order to rule out coordination failures. Suppose both firms attempt to enter first at the same time ; then only one firm (each with probability one‐half) actually enters at that time and becomes the leader, while the other firm becomes the follower and may postpone its entry.…”

“…Argenziano and Schmidt‐Dengler () note that in a preemption game, increasing the number of competitors beyond a duopoly does not bring forward the time of first entry. Argenziano and Schmidt‐Dengler () show that when the preemption race among late investors is sufficiently intense, the preemption incentive for earlier investors disappears, and clustering may occur.…”

“…For example, the timing in the models of Argenziano and Schmidt‐Dengler (, , ) corresponds to a firm's timing of entry into a new market. On the other hand, the timing in the models of Reinganum (, ) and Fudenberg and Tirole () corresponds to a firm's timing of adopting a new technology.…”

Strategic entry and potential competition: Evidence from compressed gas fuel retail

“…It seems natural to conjecture that increasing the number of competitors beyond two leads to even more hurried entry and further efficiency losses. However, the theoretical literature does not deliver an unambiguous predictions on the timing of entry in oligopoly games as a function of the intensity of competition (Shen and Villas-Boas (2010); Argenziano and Schmidt-Dengler (2014)): under certain conditions, the presence of an additional competitor may even delay entry (Argenziano and Schmidt-Dengler (2013)). Shedding light on the issue has proven equally hard on the empirical front.…”

Innovation in a generalized timing game

“…Equivalent assumptions are adopted by Dutta et al (1993), Dutta et al (1995), Hoppe and Lehmann-Grube (2005) and Argenziano and Schmidt-Dengler (2013a). For example, Assumption 1 replicates A1 of Hoppe and Lehmann-Grube (2005).…”