On the Value of Incumbency: Managerial Reference Point and Loss Aversion
AbstractIn discussing the market entry decision and the strategic interaction between an incumbent firm and an entrant the focus in the literature is on the different asymmetries that exist between the incumbent and the entrant. These asymmetries can be cost asymmetries, capacity asymmetries, information asymmetries or any other factor that affect the cash flow. In this paper we claim that there is also a great importance to the fact that one fir is in the industry and it is the incumbent while the other firm is outside the industry and that even without any other asymmetries between the firms we should expect a different behavior from the two types of firms. Making use of the existing literature on decision making under uncertainty the paper focus on reference dependent preferences and on loss aversion. The paper demonstrates that having different reference point affect the post entry game equilibrium and gives an advantage to the incumbent firm. We define this advantage as the value of incumbency. The paper demonstrates that the firms' reference points and loss aversions affect the self selecion of entrants and the type of industry that will emerge.
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Bibliographic InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1020.
Date of creation: Jan 1993
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Other versions of this item:
- Fershtman, Chaim, 1996. "On the value of incumbency managerial reference points and loss aversion," Journal of Economic Psychology, Elsevier, vol. 17(2), pages 245-257, April.
- Fershtman, C., 1993. "On the Value of Incumbency Managerial Reference Point and loss Aversion," Papers 7-93, Tel Aviv - the Sackler Institute of Economic Studies.
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