Finance Seminar - Neng Wang (Columbia GSB)

Abstract: Standard strategic real-option models predict that firms exercise their growth options too soon because they fear losing the advantage of being the first mover (Fudenberg and Tirole, 1985; Dixit and Pindyck, 1994; Grenadier, 1996). In contrast, we show that firms often enter too late when the second mover has a cost-saving advantage over the first mover. In the unique symmetric equilibrium, firms enter probabilistically when market demand is sufficiently high (mixed entry strategies), causing inefficient entry delays similar to the war of attrition. Moreover, the interaction between first-mover and second-mover advantages fundamentally changes firm equilibrium strategies and real-option values, producing highly nonlinear and non-monotonic entry predictions. Technically, we show that the symmetric equilibrium solution features five regions. In addition to the option-value-of-waiting and rushing-to-enter regions in standard models with the first-mover advantage only, three new regions arise: a waiting-to-be-Follower region and two disconnected probabilistic-entry regions.

Location: TBC