The Timing and Location of Entry in Growing Markets: Subgame Perfection at Work

54 Pages Posted: 31 Dec 2019

See all articles by Bryan Bollinger

Bryan Bollinger

New York University (NYU) - Department of Marketing

Ulrich Doraszelski

University of Pennsylvania - The Wharton School

Kenneth L. Judd

Stanford University - The Hoover Institution on War, Revolution and Peace; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP); National Bureau of Economic Research (NBER)

Ryan C. McDevitt

Fuqua Graduate School of Business - Duke University; Duke Innovation & Entrepreneurship Initiative

Date Written: December 6, 2019

Abstract

We develop a dynamic model in which firms decide when and where to enter a growing market. We do not pre-specify the order of entry, allowing instead for the roles of leader and follower to be determined endogenously. We characterize the subgame perfect equilibrium of the dynamic game and show that the times and locations of entry are governed by the threat of preemption. Because each rm has the opportunity to preempt its rival, both firms tend to enter too early. This in turn leads to rent dissipation. We show that rent dissipation may be far greater than when it is assumed that firms enter the market in a pre-specified order, the assumption made in the existing literature on spatial competition. In an empirical application, we study the entry of restaurants, gas stations, and hotels at highway intersections, finding results largely consistent with our model's predictions.

Keywords: dynamic entry games

JEL Classification: L10

Suggested Citation

Bollinger, Bryan and Doraszelski, Ulrich and Judd, Kenneth L. and McDevitt, Ryan C., The Timing and Location of Entry in Growing Markets: Subgame Perfection at Work (December 6, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3500963 or http://dx.doi.org/10.2139/ssrn.3500963

Bryan Bollinger (Contact Author)

New York University (NYU) - Department of Marketing ( email )

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Ulrich Doraszelski

University of Pennsylvania - The Wharton School ( email )

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Kenneth L. Judd

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
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Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Ryan C. McDevitt

Fuqua Graduate School of Business - Duke University ( email )

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Durham, NC 27708
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HOME PAGE: http://www.ryanmcdevitt.com

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
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