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Explaining Excess Entry in Winner-Take-All Markets

Author

Listed:
  • Vincent Laferrière

    (University of Lausanne, FDCA, CH-1015 Lausanne, Switzerland)

  • David Staubli

    (Swiss Federal Tax Administration, CH-3003 Bern, Switzerland)

  • Christian Thöni

    (University of Lausanne, FDCA, CH-1015 Lausanne, Switzerland)

Abstract

We report experimental data from standard market entry games and winner-take-all games. At odds with traditional decision-making models with risk aversion, the winner-take-all condition results in substantially more entry than the expected-payoff-equivalent market entry game. We explore three candidate explanations for excess entry: blind spot, illusion of control, and joy of winning, none of which receive empirical support. We provide a novel theoretical explanation for excess entry based on cumulative prospect theory and test it empirically. Our results suggest that excess entry into highly competitive environments is not caused by a genuine preference for competing, but is instead driven by probability weighting. Market entrants overweight the small probabilities associated with the high payoff outcomes in winner-take-all markets, while they underweight probable failures.

Suggested Citation

  • Vincent Laferrière & David Staubli & Christian Thöni, 2023. "Explaining Excess Entry in Winner-Take-All Markets," Management Science, INFORMS, vol. 69(2), pages 1050-1069, February.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:2:p:1050-1069
    DOI: 10.1287/mnsc.2022.4397
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    More about this item

    Keywords

    winner-take-all market; market entry game; excess entry; cumulative prospect theory; probability weighting; experiment;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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