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M08.L05 — First-Mover Advantage and Sequential Games

Module: Module 08 — Game Theory and Oligopoly Lesson: L05 of 05 Duration: ~30 minutes Level: Introductory Provenance: OpenStax Principles of Microeconomics 3e | MIT OCW 14.01

Learning Objective

Evaluate how timing affects strategic decisions in sequential games.

Sequential vs. Simultaneous Games

  • Simultaneous games: Players act without knowing rivals' choices (e.g., Prisoners' Dilemma).
  • Sequential games: Players move in sequence, observing prior actions (e.g., Stackelberg model).

First-Mover Advantage

The first player ("leader") can shape the game to their benefit: - Entry deterrence: Incumbents invest heavily to discourage competitors (e.g., Australian mining firms securing port access). - Commitment devices: Irreversible actions (e.g., Qantas pre-booking airport slots) force rivals to adapt.

Worked Example: Airport Slot Allocation

Scenario: Two airlines (Qantas, Virgin) compete for Sydney Airport slots. 1. Qantas moves first: Secures prime departure times. 2. Virgin responds: Chooses less optimal slots → lower profitability. 3. Outcome: Qantas gains long-term advantage.

Common Misconception

"First movers always win."

First-mover advantage depends on the ability to sustain commitments (e.g., R&D costs). Late movers can sometimes leapfrog with innovation.

Key Takeaways

  • Sequential games are modeled using game trees (extensive form).
  • First-mover advantage arises from credible commitments.
  • Backward induction predicts rational play by working backward from outcomes.
  • Australian examples include mining, aviation, and telecom.

Practice

  1. Why might a mining firm bid early for exploration rights?
  2. How does backward induction simplify decision-making?
  3. Name a disadvantage of being a first mover.

Further Resources

Provenance: OpenStax Principles of Microeconomics 3e | MIT OCW 14.01