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Who Thinks about the Competition? Managerial Ability and Strategic Entry in US Local Telephone Markets

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  • Avi Goldfarb
  • Mo Xiao

Abstract

We examine US local telephone markets shortly after the Telecommunications Act of 1996. The data suggest that more experienced, better-educated managers tend to enter markets with fewer competitors. This motivates a structural econometric model based on behavioral game theory that allows heterogeneity in managers' ability to conjecture competitor behavior. We find that manager characteristics are key determinants in managerial ability. This estimate of ability predicts out-of-sample success. Also, the measured level of ability rises following a shakeout, suggesting that our behavioral assumptions may be most relevant early in the industry's life cycle. (JEL L96, L98, M10)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 7 (December)
Pages: 3130-61

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:7:p:3130-61

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  1. Foster, Lucia & Haltiwanger, John C. & Syverson, Chad, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," IZA Discussion Papers 1705, Institute for the Study of Labor (IZA).
  2. Panle Jia, 2008. "What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry," Econometrica, Econometric Society, Econometric Society, vol. 76(6), pages 1263-1316, November.
  3. Aradillas-Lopez, Andres & Tamer, Elie, 2008. "The Identification Power of Equilibrium in Simple Games," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 26, pages 261-310.
  4. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1313-26, December.
  5. Ignacio Esponda, 2008. "Behavioral Equilibrium in Economies with Adverse Selection," American Economic Review, American Economic Association, American Economic Association, vol. 98(4), pages 1269-91, September.
  6. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  7. Judith Chevalier & Glenn Ellison, 1996. "Are Some Mutual Funds Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance," NBER Working Papers 5852, National Bureau of Economic Research, Inc.
  8. Katja Seim, 2006. "An empirical model of firm entry with endogenous product‐type choices," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 619-640, 09.
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Citations

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Cited by:
  1. Li, Shanjun & Liu, Yanyan & Deininger, Klaus, 2009. "How important are peer effects in group lending?: Estimating a static game of incomplete information," IFPRI discussion papers 940, International Food Policy Research Institute (IFPRI).
  2. Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2013. "Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 5-62, March.
  3. Nathan Yang, 2011. "An Empirical Model of Industry Dynamics with Common Uncertainty and Learning from the Actions of Competitors," Working Papers, NET Institute 11-16, NET Institute.
  4. Alexander L. Brown & Colin F. Camerer & Dan Lovallo, 2012. "To Review or Not to Review? Limited Strategic Thinking at the Movie Box Office," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 4(2), pages 1-26, May.
  5. Naoaki Minamihashi, 2012. "Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks," Working Papers, Bank of Canada 12-26, Bank of Canada.
  6. Yingyao Hu & Yutaka Kayaba & Matt Shum, 2010. "Nonparametric Learning Rules from Bandit Experiments: The Eyes have it!," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 560, The Johns Hopkins University,Department of Economics.
  7. Ying Fan & Xiao Mo, 2010. "Estimating the Option Value of Waiting: A Dynamic Entry Game of the U.S. Local Telephone Competition," Working Papers, NET Institute 10-14, NET Institute.
  8. Michelle Alexopoulos & Trevor Tombe, 2010. "Management Matters," Working Papers tecipa-406, University of Toronto, Department of Economics.
  9. Victor Aguirregabiria & Arvind Magesan, 2012. "Identification and estimation of dynamic games when players' beliefs are not in equilibrium," Working Papers tecipa-449, University of Toronto, Department of Economics.
  10. David Gill & Victoria Prowse, 2013. "Cognitive ability and learning to play equilibrium: A level-k analysis," Economics Series Working Papers 641, University of Oxford, Department of Economics.
  11. Avi Goldfarb & Teck-Hua Ho & Wilfred Amaldoss & Alexander Brown & Yan Chen & Tony Cui & Alberto Galasso & Tanjim Hossain & Ming Hsu & Noah Lim & Mo Xiao & Botao Yang, 2012. "Behavioral models of managerial decision-making," Marketing Letters, Springer, Springer, vol. 23(2), pages 405-421, June.
  12. Wang, Zhongmin & Xu, Minbo, 2013. "Selling a Dollar for More Than a Dollar? Evidence from Online Penny Auctions," Discussion Papers, Resources For the Future dp-13-15, Resources For the Future.
  13. Mo Xiao & Ying Fan, 2012. "Entry under Subsidy: the Competitive U.S. Local Telephone Industry," 2012 Meeting Papers, Society for Economic Dynamics 374, Society for Economic Dynamics.
  14. Victor Aguirregabiria & Arvind Magesan, 2012. "Identification and Estimation of Dynamic Games when Players' Beliefs Are Not in Equilibrium," Working Papers 2012-03, Department of Economics, University of Calgary.

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