What is meant by the first-mover advantage? How does commitment matter in a game with a first-mover advantage? a. Some games have a first-mover advantage and others do not. Suppose you were playing rock-paper-scissors as an extensive form game

Question

First you choose rock, or paper, or scissors and then your opponent makes a choice. Is there a first-mover advantage in this game? b. Two firms are thinking of entering a new market. If only one enters, it will make high profits. If two firms enter, then both will suffer losses. Suppose that the game is played sequentially, with Firm 1 deciding first. Does this game have a first-mover advantage?

Answer 1

A player can have a first-mover advantage in a game that is played sequentially rather than simultaneously. The sequential game features a first-mover advantage if, in equilibrium, the first mover earns more benefits than the second mover. However, not all games will have a first-mover advantage. A commitment is an action that one cannot turn back on later, even if it is costly. Using backward induction, we can choose the strategy that is optimal given the other player's actions. However, a commitment device would be needed to ensure that the other player sticks to his or her strategy when push comes to shove.
a. No. You will choose either rock, paper, or scissors. Your opponent will see your move, and she can take advantage of your decision when it is her turn.
b. Yes. The firm that goes first can enter; the firm that goes second will then have no incentive to enter.