IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v101y2011i7p3130-61.html
   My bibliography  Save this article

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

Author

Listed:
  • 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)

Suggested Citation

  • Avi Goldfarb & Mo Xiao, 2011. "Who Thinks about the Competition? Managerial Ability and Strategic Entry in US Local Telephone Markets," American Economic Review, American Economic Association, vol. 101(7), pages 3130-3161, December.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:7:p:3130-61
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.7.3130
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: http://www.aeaweb.org/aer/data/dec2011/20090403_data.zip
    File Function: dataset accompanying article
    Download Restriction: no
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Judith Chevalier & Glenn Ellison, 1999. "Are Some Mutual Fund Managers Better Than Others? Cross‐Sectional Patterns in Behavior and Performance," Journal of Finance, American Finance Association, vol. 54(3), pages 875-899, June.
    2. Colin F. Camerer & Teck-Hua Ho & Juin-Kuan Chong, 2004. "A Cognitive Hierarchy Model of Games," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 861-898.
    3. Nicholas Economides & Katja Seim & V. Brian Viard, 2008. "Quantifying the benefits of entry into local phone service," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 699-730, September.
    4. Federico Mini, 2001. "The Role of Incentives for Opening Monopoly Markets: Comparing GTE and BOC Cooperation with Local Entrants," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 379-414, September.
    5. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
    6. Aradillas-Lopez, Andres & Tamer, Elie, 2008. "The Identification Power of Equilibrium in Simple Games," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 261-310.
    7. Shane Greenstein & Michael Mazzeo, 2006. "The Role Of Differentiation Strategy In Local Telecommunication Entry And Market Evolution: 1999–2002," Journal of Industrial Economics, Wiley Blackwell, vol. 54(3), pages 323-350, September.
    8. Ali Hortaçsu & Steven L. Puller, 2008. "Understanding strategic bidding in multi‐unit auctions: a case study of the Texas electricity spot market," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 86-114, March.
    9. Angelique Augereau & Shane Greenstein & Marc Rysman, 2006. "Coordination versus differentiation in a standards war: 56K modems," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 887-909, December.
    10. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    11. Ignacio Esponda, 2008. "Behavioral Equilibrium in Economies with Adverse Selection," American Economic Review, American Economic Association, vol. 98(4), pages 1269-1291, September.
    12. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    13. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-1326, December.
    14. 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, September.
    15. Juin-Kuan Chong & Colin F. Camerer & Teck-Hua Ho, 2005. "Cognitive Hierarchy: A Limited Thinking Theory in Games," Springer Books, in: Rami Zwick & Amnon Rapoport (ed.), Experimental Business Research, chapter 0, pages 203-228, Springer.
    16. Panle Jia, 2008. "What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry," Econometrica, Econometric Society, vol. 76(6), pages 1263-1316, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aradillas-Lopez, Andres, 2012. "Pairwise-difference estimation of incomplete information games," Journal of Econometrics, Elsevier, vol. 168(1), pages 120-140.
    2. Naoaki Minamihashi, 2012. "Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks," Staff Working Papers 12-26, Bank of Canada.
    3. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    4. Shengwu Li, 2017. "Obviously Strategy-Proof Mechanisms," American Economic Review, American Economic Association, vol. 107(11), pages 3257-3287, November.
    5. Paul L. E. Grieco, 2014. "Discrete games with flexible information structures: an application to local grocery markets," RAND Journal of Economics, RAND Corporation, vol. 45(2), pages 303-340, June.
    6. Benjamin Patrick Evans & Mikhail Prokopenko, 2021. "Bounded rationality for relaxing best response and mutual consistency: The Quantal Hierarchy model of decision-making," Papers 2106.15844, arXiv.org, revised Mar 2023.
    7. Miguel A Costa-Gomes & Vincent P Crawford & Nagore Iriberri, 2008. "Comparing Models of Strategic Thinking in Van Huyck, Battalio, and Beil’s Coordination Games," Levine's Working Paper Archive 122247000000002346, David K. Levine.
    8. Victor Aguirregabiria, 2021. "Identification of firms’ beliefs in structural models of market competition," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 5-33, February.
    9. Ying Fan & Xiao Mo, 2010. "Estimating the Option Value of Waiting: A Dynamic Entry Game of the U.S. Local Telephone Competition," Working Papers 10-14, NET Institute.
    10. Ying Fan & Mo Xiao, 2015. "Competition and subsidies in the deregulated US local telephone industry," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 751-776, October.
    11. Heller, Yuval, 2015. "Three steps ahead," Theoretical Economics, Econometric Society, vol. 10(1), January.
    12. Xiao, Mo & Orazem, Peter F., 2011. "Does the fourth entrant make any difference?: Entry and competition in the early U.S. broadband market," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 547-561, September.
    13. Li, Shanjun & Liu, Yanyan & Deininger, Klaus W., 2009. "How Important are Peer Effects in Group Lending? Estimating a Static Game of Incomplete Information," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49497, Agricultural and Applied Economics Association.
    14. Ali Hortaçsu & Fernando Luco & Steven L. Puller & Dongni Zhu, 2019. "Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets," American Economic Review, American Economic Association, vol. 109(12), pages 4302-4342, December.
    15. Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2010. "Strategic Thinking," Levine's Working Paper Archive 661465000000001148, David K. Levine.
    16. Jun, Sung Jae & Pinkse, Joris, 2020. "Counterfactual prediction in complete information games: Point prediction under partial identification," Journal of Econometrics, Elsevier, vol. 216(2), pages 394-429.
    17. Georganas, Sotiris & Healy, Paul J. & Weber, Roberto A., 2015. "On the persistence of strategic sophistication," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 369-400.
    18. Mo Xiao & Ying Fan, 2012. "Entry under Subsidy: the Competitive U.S. Local Telephone Industry," 2012 Meeting Papers 374, Society for Economic Dynamics.
    19. García-Pola, Bernardo & Iriberri, Nagore & Kovářík, Jaromír, 2020. "Non-equilibrium play in centipede games," Games and Economic Behavior, Elsevier, vol. 120(C), pages 391-433.
    20. Bosch-Domènech, Antoni & Vriend, Nicolaas J., 2013. "On the role of non-equilibrium focal points as coordination devices," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 52-67.

    More about this item

    JEL classification:

    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Who Thinks about the Competition? Managerial Ability and Strategic Entry in US Local Telephone Markets (AER 2011) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:101:y:2011:i:7:p:3130-61. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.