Demand uncertainty, product differentiation, and entry timing under spatial competition

We investigate entry timing and product position decisions with market size uncertainty under continuous-time Hotelling type spatial duopoly competition. We show how entry timing and product position interact under uncertainty. The expected result under real options holds: the leader’s entry threshold monotonically increases with volatility, which means that the leader abandons earlier period monopoly profits, which are not so time discounted. The significant findings are as follows: First, from the expected result, the larger the abandoned monopoly profits in earlier periods through volatility, the closer to the edge the leader’s product position. Second, this property of the leader’s decision regarding its product position makes the follower’s entry threshold non-monotonic with a positive correlation to volatility, in contrast to previous studies in the real options literature. The above two results have an important implication: the leader values the abandoned monopoly profits in earlier periods through volatility more than the highly increased monopoly profits in later periods through delayed entry by the follower.