Demand Uncertainty, Product Differentiation, and Entry Timing Under Spatial Competition

Abstract

We investigate the decision of entry timing and product positions under market size uncertainty with Brownian motion for continuous-time spatial duopoly competition. We show the following results. First, the leader is more likely to increase the degree of product differentiation as volatility increases and to decrease it as volatility decreases. Second, the entry threshold of the follower non-monotonically increases in volatility, which is in contrast to previous studies in the real options literature. Finally, a more significant entry cost asymmetry between firms places the leader closer to the edge in a preemptive-entry equilibrium and closer to the center in a sequential-entry equilibrium.

Keywords: product positioning; Hotelling model; continuous-time; entry timing; real options

JEL Classification: C73, D81, L11, L13