Coordination Failures and Stackelberg Leadership in Housing Development with Network Effects

TL;DR

This paper examines how a large developer can resolve coordination failures in housing markets with network effects by acting as a Stackelberg leader, ensuring high-supply outcomes and improving welfare.

Contribution

It introduces a Stackelberg game framework showing that a first-mover developer commitment can eliminate coordination failures in housing markets with network effects.

Findings

Large developer's commitment guarantees high-supply equilibrium.

Coordination failure can be resolved through Stackelberg leadership.

Market underprovides housing compared to social optimum.

Abstract

I study coordination failures in housing development markets with network effects, where the value of building depends on aggregate supply. When network effects are sufficiently strong and convex, multiple equilibria arise: a low-supply coordination failure and a high-supply outcome. Without a coordination mechanism, equilibrium is indeterminate. I introduce a large developer who moves first in a Stackelberg game, committing to housing supply before atomistic developers make entry decisions. The main result is that the large developer always commits at least to the high-supply equilibrium, eliminating the coordination failure by pushing past the unstable threshold that separates the low and high outcomes. The result is unconditional; it holds for general demand functions and cost distributions, and does not depend on which stable continuation equilibrium materializes. The leader's commitment inverts standard monopoly intuition: first-mover commitment can improve welfare by resolving a coordination problem that atomistic markets cannot solve on their own. I also characterize when the developer builds beyond the high equilibrium into a monopoly region, and show that the market underprovides housing relative to the social optimum.