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

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.