Commitment, First-Mover-, and Second-Mover Advantage

In this paper we are studying the question under which circumstances a firm with a first-mover advantage may get leapfrogged by a follower. At the market stage we assume a Stackelberg structure, i.e. the leader commits to a quantity and the follower then reacts to it. It is well-known that the leader has a first-mover advantage. In our model, we additionally allow the owners of both firms to select the internal organization and the production technology before quantities are determined and produced. That is, leader and follower can additionally use two other commitment strategies alternatively or in combination: investing in (process) R&D and delegating quantity decisions to managers. Despite the symmetry of options for the two firms, we find that there is a unique equilibrium in which both firms invest in process R&D, only the follower delegates, and the follower can overcome the first-mover advantage of the quantity leader and obtain a higher profit than the leader. Although seemingly similar, our analysis reveals that there are some important differences between the two commitment devices "cost-reducing R&D" and "delegation to managers"