Sequential product positioning and entry timing under differential costs in a continuous-time model

We investigate the product positioning decisions of two firms that enter a market sequentially under a duopoly competition. Two important assumptions are made: differential marginal production costs between the two firms, and endogenous entry timing of a follower in a continuous-time setting. We ana...

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Bibliographic Details
Published in:Annals of operations research 2024, Vol.332 (1-3), p.277-301
Main Authors: Ebina, Takeshi, Nishide, Katsumasa
Format: Article
Language:English
Subjects:
Business and Management
Combinatorics
Consumers
Continuous time systems
Cost analysis
Costs
Duopoly
Markets
Operating costs
Operations Research/Decision Theory
Original Research
Production costs
Theory of Computation
Time setting
Tradeoffs
Uncertainty
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Summary:We investigate the product positioning decisions of two firms that enter a market sequentially under a duopoly competition. Two important assumptions are made: differential marginal production costs between the two firms, and endogenous entry timing of a follower in a continuous-time setting. We analyze a standard location-pricing Hotelling game with quadratic transportation costs with the points of departure being that the two firms (i) are allowed to have different (constant) marginal costs; (ii) enter sequentially in a pre-determined order in a market in which the consumers are growing over time; and (iii) are not restricted to choosing positions inside the interval in which consumer preferences are located. For the first mover, the dynamic market growth can give rise to a trade-off between exploiting short-run monopoly and long-run duopoly profits. This trade-off affects the equilibrium positions when the first mover has a larger marginal cost as well as a larger discount rate, in which case the first mover chooses its position at the center of the interval along which consumers are located. We also introduce uncertainty regarding entry and marginal costs to examine their effects on positioning and entry timing. If the entry cost of the follower firm is uncertain for the leader firm, then the leader firm is likely to choose its position farther away from the most attractive point. Moreover, we show that the follower firm enters the market earlier if the leader firm faces such uncertainty.
ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-023-05665-z