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The East End, the West End, and King's Cross: On clustering in the four-player hotelling game

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  • Huck, Steffen
  • Müller, Wieland
  • Vriend, Nicolaas J.

Abstract

This article investigates whether decision makers intuitively optimize close to the normative prediction in entrepreneurial decision situations where their time must be allocated between a wage job and a newly formed venture. We offer an analytical model based on maximizing expected utility, and derive an optimal time allocation strategy for decreasing, constant and increasing returns from time invested in the venture. The model's predictions are tested in a simple questionnaire experiment where respondents have to detect corner solutions, that is, they should allocate to the venture either the maximum or the minimum possible time. Respondents are found to allocate time relatively close to the normative predictions, although with systematic deviations that are consistent with well-known decision anomalies. Risk propensity is found to have an impact on the decisions, but it should not according to the model. Respondents appear to use an anchoring and adjustment procedure and are influenced by the so-called affect heuristic, which may explain why those who do not mathematically optimize have their decision partially driven by their risk propensity. Implications of our findings for entrepreneurs and institutions dealing with entrepreneurs are discussed. --

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Bibliographic Info

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2000,24.

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Date of creation: 2000
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Handle: RePEc:zbw:sfb373:200024

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Keywords: Decision Making; Intuitive Optimizing; Micro Economics Model; Time Allocation Strategy; Entrepreneurship; Questionnaire Experiment;

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  1. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  2. Osborne, Martin J & Pitchik, Carolyn, 1986. "The Nature of Equilibrium in a Location Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 223-37, February.
  3. Collins, Richard & Sherstyuk, Katerina, 1999. "Spatial Competition with Three Firms: An Experimental Study," Working Papers 1057, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. B.Curtis Eaton & Richard G. Lipsey, 1972. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," Working Papers 87, Queen's University, Department of Economics.
  5. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 27-41, January.
  6. Brown Kruse, Jamie & Schenk, David J., 2000. "Location, cooperation and communication: An experimental examination," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 59-80, January.
  7. Shaked, A, 1982. "Existence and Computation of Mixed Strategy Nash Equilibrium for 3-Firms Location Problem," Journal of Industrial Economics, Wiley Blackwell, vol. 31(1-2), pages 93-96, September.
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Cited by:
  1. Lisa R. Anderson & Beth A. Freeborn & Jessica Holmes & Mark Jeffreys & Dan Lass & Jack Soper, 2006. "Location, Location, Location! A Classroom Demonstration of the Hotelling Model," Working Papers 44, Department of Economics, College of William and Mary, revised 05 Feb 2007.
  2. Barreda-Tarrazona, Iván & García-Gallego, Aurora & Georgantzís, Nikolaos & Andaluz-Funcia, Joaquín & Gil-Sanz, Agustín, 2011. "An experiment on spatial competition with endogenous pricing," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 74-83, January.
  3. Henrik Orzen & Martin Sefton, 2006. "An Experiment on Spatial Price Competition," Discussion Papers 2006-14, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  4. Camacho-Cuena, Eva & Garcia-Gallego, Aurora & Georgantzis, Nikolaos & Sabater-Grande, Gerardo, 2005. "Buyer-seller interaction in experimental spatial markets," Regional Science and Urban Economics, Elsevier, vol. 35(2), pages 89-108, March.

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