9781118041581

Competitive Strategy 415

is to stay out. Thus, entry by firm 1 alone is an equilibrium. By the same rea-

soning, entry by firm 2 alone is an equilibrium. (“Both firms entering” is not

an equilibrium, nor is “both firms staying out.” Check this.)

Rational competitors should reach one of the equilibria, but it is difficult to

say which one. Each firm wishes to be the one that enters the market and gains

the profit. One way for a player (say, Borders) to claim its desired equilibrium

is to be the first to enter. Here there is a first-mover advantage. Given the oppor-

tunity to make the first move, Borders should enter and preempt the market.

Barnes & Noble’s best second move is to stay out. By stealing a march on the

opposition—that is, being first to market—a firm obtains its preferred equilib-

rium. Even if the firms require the same amount of time to launch a superstore,

Borders can claim a first-mover advantage if it can make a crediblecommitment

to enter the market. To be credible, Borders Group’s behavior must convince

its rival of its entry commitment;^6 a mere threat to that effect is not enough. A

campaign announcing and promoting the new store would be one way to signal

the firm’s commitment; another would be entering into a binding real estate

lease. Of course, sometimes both firms commit to entry with disastrous results.

TABLE 10.5

Market Entry

There are two equilibria.

If one firm enters the

market, the other

should stay out.

Borders

Stay Out Enter

Stay Out 0, 0 0, 4

Barnes & Noble

Enter 4, 0 4,  4

(^6) Competitive situations such as these often are referred to as games of “chicken.” Two trucks loaded
with dynamite (or two cars loaded with teenagers) are racing toward each other along a one-lane
road. The first to swerve out of the way is chicken. The only equilibrium has one side holding true
to course and the other swerving. Here the issue of commitment is made in dramatic terms.
Boeing and Airbus (a European consortium) compete to sell similar aircraft worldwide.
The following table depicts the players’ actions and hypothetical payoffs. What are the
equilibrium outcomes? How does the outcome change if European governments pay a
$40 million production subsidy to Airbus?
Airbus
Produce Do Not Produce
Produce 20,  20 80, 0
Boeing
Do Not Produce 0, 80 0, 0
CHECK
STATION 4
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