Question

Assess whether a firm’s profits can be enhanced by changing the timing of decisions or the order of strategic moves and whether doing so creates first- or second-mover advantages.

Short answer

Firms can enhance profits by changing the timing of decisions, creating a first-mover advantage.

Step-by-step solution

 First- Mover Advantage

The first-mover firm gets an additional advantage by capturing the market through higher output commitment than the new entrant.

Changing order of strategic moves:

This situation can be understood through a situation where two firms, A and B, choose their strategies accordingly, which can be understood through a game of dominant strategy.

Here, Firm A, the first mover, will choose low output as it will gain $\$30$On the other hand, Firm B will choose high output for $\$20$. Thus, we can conclude that the optimum condition would be A with a profit of $\$10$and B of $\$20$.

Changing the timing of decisions:

Let us consider a sequential game where Firm $A$gets to choose before Firm $B$.From the above game tree, we can see that if $A$is the first mover, chooses low output, and if $B$chooses high output, then the net outcome would be $A$receiving $\$10$On the other hand, if $A$Chooses high output, then Firm $B$has the only choice of opting for low output with profits of $\$5$Thus, one can see that Firm B has to face the disadvantages of being the second mover.

 Second-Mover Advantage

Although we can see that first-movers have comparative advantages over the second-mover, second-movers have some advantages based on particular situations.

If the second mover produces a new product after the first mover, then the former can earn more significant pay-offs than the latter if it free rides on the first mover's investment.

Moreover, a second-mover has the more significant advantage of learning from the mistakes of the first-mover. In such cases, the second mover can produce better cost-effect products than the first mover.

Thus, one can understand that both strategies can enhance profits.