Competing for Dominance in Technology Markets
41 Pages Posted: 6 Dec 2023
Date Written: November 28, 2023
Technology markets are inherently winner-take-all, and competition for dominance can be modeled as a contest. Uncertainty is a common feature of technology contests. A competitor is often uncertain about the set of rivals that it faces, and the entering firms can attempt to influence their winning chances by undertaking a pre-contest action. This may be an investment in a technology or technological improvement, the outcome of which is uncertain. We model this competition as an all-pay auction in which the entry decision is endogenous, and where – upon entry – players may invest in acquiring a better technology; a player’s investment cost is private knowledge, and the outcome of the investment is stochastic. We characterize equilibrium in terms of two thresholds of the cost parameter that determine entry and then investment, and investigate how the equilibrium is affected by uncertainty related to the investment (both the likelihood of success and its return). Our model finds applications in many technology-based markets such as virtual currency mining, mass entertainment, internet technology and wealth management.
Keywords: Contest; Technology; Standards; Investment; Endogenous entry
JEL Classification: D02, D72, D81, D82
Suggested Citation: Suggested Citation