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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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
Date of revision:
Contact details of provider:
Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Gilbert, Richard J., 1989.
"Mobility barriers and the value of incumbency,"
Handbook of Industrial Organization,
in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 8, pages 475-535
- Gilbert, Richard, 1988. "Mobility Barriers and the Value of Incumbency," Department of Economics, Working Paper Series qt52q9j63w, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Richard J. Gilbert., 1988. "Mobility Barriers and the Value of Incumbency," Economics Working Papers 8895, University of California at Berkeley.
- Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
- Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
- Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
- Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
- David Bowman & Deborah Minehart & Matthew Rabin, 1994.
"Loss aversion in a consumption/savings model,"
International Finance Discussion Papers
492, Board of Governors of the Federal Reserve System (U.S.).
- Pennings, Joost M.E. & Leuthold, Raymond M., 2001.
"A Behavioral Approach Towards Futures Contract Usage,"
Mansholt Working Papers
46448, Wageningen University, Mansholt Graduate School of Social Sciences.
- Pennings, Joost M E & Leuthold, Raymond M, 2001. "A Behavioural Approach towards Futures Contract Usage," Australian Economic Papers, Wiley Blackwell, vol. 40(4), pages 461-78, December.
- Pennings, Joost M.E. & Leuthold, Raymond M., 2001. "A behavioural approach towards futures contract usage," Open Access publications from Maastricht University urn:nbn:nl:ui:27-13118, Maastricht University.
- Jakopin, Nejc M. & Klein, Andreas, 2012. "First-mover and incumbency advantages in mobile telecommunications," Journal of Business Research, Elsevier, vol. 65(3), pages 362-370.
- Bram Driesen & Andrés Perea & Hans Peters, 2010.
"On Loss Aversion in Bimatrix Games,"
Theory and Decision,
Springer, vol. 68(4), pages 367-391, April.
- Pennings, Joost M. E., 2002.
"Pulling the trigger or not: Factors affecting behavior of initiating a position in derivatives markets,"
Journal of Economic Psychology,
Elsevier, vol. 23(2), pages 263-278, April.
- Pennings, Joost M.E., 2002. "Pulling the trigger or not: Factors affecting behavior of initiating a position in derivatives markets," Open Access publications from Maastricht University urn:nbn:nl:ui:27-13095, Maastricht University.
- Hendrikse, G.W.J. & Veerman, C.P., 2003. "On The Future of Co-operatives," Research Paper ERS-2003-007-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker).
If references are entirely missing, you can add them using this form.