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Entry and Market Selection of Firms: A Laboratory Study

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Listed author(s):
  • Jordi Brandts
  • Ayça Ebru Giritligil

Abstract

We study competition in experimental markets in which two incumbents face entry by three other firms. Our treatments vary with respect to three factors: sequential vs. block or simultaneous entry, the cost functions of entrants and the amount of time during which incumbents are protected from entry. Before entry incumbents are able to collude in all cases. When all firms' costs are the same entry always leads consumer surplus and profits to their equilibrium levels. When entrants are more efficient than incumbents, entry leads consumer surplus to equilibrium. However, total profits remain below equilibrium, due to the fact that the inefficient incumbents produce too much and efficient entrants produce too little. Market behavior is satisfactory from the consumers' standpoint, but does not yield adequate signals to other potential entrants. These results are not affected by whether entry is simultaneous or sequential. The length of the incumbency phase does have some subtle effects.

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File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/299.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 299.

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Date of creation: Sep 2006
Handle: RePEc:bge:wpaper:299
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Keywords: Market selection; Imperfect competititon; Entry; experiments;

Other versions of this item:

Find related papers by JEL classification:
  • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
  • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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