First Mover Advantage, Question: You are a manager of Kleenex and you compete di
ID: 1249193 • Letter: F
Question
First Mover Advantage,Question: You are a manager of Kleenex and you compete directly with Puffs selling facial tissues in America. Consumers find the two products to be indistinguishable. The inverse market demand for facial tissues is P = 3-Q (in dollars) in America and both firms produce at a marginal cost of $1. You have a decision to make about competing with Puffs in New Zealand, where the inverse market demand for facial tissues is P = 3-Q (in dollars).
Option A. Puffs sets up its factories and distribution networks now, and you set up later. And both produce at a marginal cost of $1.00
Option B. You hurry set up your factories and distribution networks now, and Puffs sets up later. Your hurry means your marginal costs are $1.20, while Puffs marginal costs remain $1.00
Which Option is better for Kleenex?
Explanation / Answer
Let's evaluate each option. I am going to use Y to mean profit and MY to mean the derivative of profit with respect to the firm's own quantity. I am going to use f to be the quantity that puffs produces and k to be the quantity that Kleenex produces. Option A. If Puffs sets up first, then Puffs will have a monopoly. Let's see how much Puffs should produce. Y=P*f-f Y=(3-f)*f-f MY=3-2f-1=0 f=1 Let's calculate Kleenex's profit if it chooses to enter. Y=P*k-k Y=(3-k-f)k-k MY=3-2k-f-1=0 k=1-f/2 k=1/2 Y=(3-k-f)k-k Y=(3-0.5-1)0.5-0.5 Y=0.25 Ok, so entry is profitable. And eventually, this will stabilize to a Cournot duopoly. Let's see what that outcome is. k=1-f/2 f=1-k/2 k=1-(0.5)*[1-k/2] k=1-0.5-0.25k (3/4)k=0.5 k=0.5*(4/3) k=f=2/3 Y=(3-k-f)k-k Y=(3-(2/3)-(2/3))*(2/3)-(2/3) Y=0.44 This is what we might call the long-run outcome. Now let's look at option B If Kleenex moves first, it will have a profit function of: Y=(3-k)k-1.2k MY=3-2k-1.2=0 k=(3-1.2)/2 k=0.9 Y=(3-k)k-1.2k Y=(3-0.9)*0.9-1.2*0.9 Y=0.81 And eventually, this will stabilize to the same Cournot duopoly equilibrium as before assuming that Kleenex's marginal cost comes back down. But initially, Kleenex will make more profit by entering first rather than second. Option B is better. First-mover's advantage.
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