Leader, Follower: Strategic Investments with Asymmetric Spillovers

This paper analyzes the strategic incentives of first and second movers in sequential investment games with Stackelberg competition and price leadership on the output market. The study shows that the follower can invest more than the leader when the outgoing spillover from the leader to the follower is sufficiently high, taking into account the outgoing spillover of the follower. This result tends to apply in quantity and price settings. It is also shown that when externalities have opposite signs, the firm with the lowest outgoing spillover is investing most. However, with externalities that have the same sign, the asymmetry of spillovers determines who invests most. A beginning is made with the investigation of the robustness of the tendencies reported.