Valuation Equilibrium and the First-Mover Advantage
25 Pages Posted: 18 Jun 2009
Date Written: June 16, 2009
In this paper, we reconsider the valuation equilibrium concept (Jehiel and Samet, 2007) and partly endogenise the grouping of actions entailed in the concept. In particular, we allow players to differentiate between a priori similar actions based on differences in the preceding history. Yet, doing so is costly. Applying the modified valuation equilibrium concept to a Stackelberg leader and a burning money game, we show that (1) the Cournot outcome is the unique equilibrium outcome of the Stackelberg game, and that (2) the mere possibility to burn money has no effect on the outcome of coordination game in stage two of the burning money game. While qualitatively in line with recent empirical evidence, the results apparently conflict with common arguments in favour of a first-mover advantage thereby highlighting the comparably high degree of rationality implicitly entailed in such arguments.
Keywords: bounded rationality, first-mover advantage, valuation equilibrium
JEL Classification: C72, D81
Suggested Citation: Suggested Citation