13.5 Disadvantages of Moving First
Moving first is not always an advantage. We discuss two possible drawbacks to moving first: the holdup problem and acting too quickly.
The Holdup Problem
One of the most serious potential problems with moving first is the holdup problem. It arises when two firms want to contract or trade with each other but one firm must move first by making a specific investment: an investment that it can use only in its transaction with the second firm. A holdup problem arises if two firms agree to work together and the firm that acts second takes advantage of a specific investment made by the firm that acts first. If the firm that acts first does not anticipate this opportunistic behavior by the second firm and it occurs, ...
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