Equilibrium in Preemption Games with Complete Information

Abstract

The returns to a firm from adopting a new technology frequently depend on when it adopts it relative to other firms. Most studies focus on markets in which firms have an incentive to adopt preemptively, but where the preferred outcome is to wait and either adopt at some later date or never adopt at all. The critical issue is the extent to which firms can coordinate their adoption dates and earn some of the profits from delayed adoption. In the models considered by Farrell and Saloner (1986), Fudenberg and Tirole (1985), and Gilbert and Harris (1984), firms generally fail to obtain any of these gains. The incentive for preemption leads to a Bertrand-like outcome in which one firm is certain to adopt as soon as the gains from preemption are positive. In some instances, the models also possess equilibria in which the firms are able to achieve the preferred outcome. Fudenberg and Tirole note that when the gains from preemption are small, there is a continuum of equilibria in which firms adopt jointly at some later date. Farrell and Saloner obtain a similar result, only in their case the preferred outcome is that neither firm ever adopts.

The comments of two referees were very helpful in the final revision of the study. Support from the C. V. Starr Center for Applied Economics is gratefully acknowledged.