Competing for Dominance in Technology Markets *
41 Pages Posted: 6 Dec 2023 Last revised: 26 Mar 2024
Date Written: August 06, 2024
Abstract
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, and 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 as an all-pay auction with an endogenous entry decision, where entrants may invest in acquiring a better technology; investment cost is private knowledge, and the outcome of the investment is stochastic. We characterize equilibrium by 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. Our model finds applications in many technology-based markets such as virtual currency mining, mass entertainment, internet technology and wealth management.
Keywords: JEL Codes: D02, D72, D81, D82 Contest, Technology, Standards, Investment, Endogenous entry
JEL Classification: D02, D72, D81, D82
Suggested Citation: Suggested Citation