IDEAS home Printed from https://ideas.repec.org/p/bge/wpaper/299.html
   My bibliography  Save this paper

Entry and Market Selection of Firms: A Laboratory Study

Author

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.

Suggested Citation

  • Jordi Brandts, 2015. "Entry and Market Selection of Firms: A Laboratory Study," Working Papers 299, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:299
    as

    Download full text from publisher

    File URL: https://bw.bse.eu/wp-content/uploads/2021/11/1299-file.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    2. R. Muller & Asha Sadanand, 2003. "Order of Play, Forward Induction, and Presentation Effects in Two-Person Games," Experimental Economics, Springer;Economic Science Association, vol. 6(1), pages 5-25, June.
    3. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2000. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 39-57, January.
    4. Jordi Brandts & Paul Pezanis‐Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, January.
    5. Rassenti, Stephen J & Smith, Vernon L & Wilson, Bart J, 2003. "Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels," Journal of Regulatory Economics, Springer, vol. 23(2), pages 109-123, March.
    6. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2004. "Two are few and four are many: number effects in experimental oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 435-446, April.
    7. Jordi Brandts & Antonio Cabrales & Gary Charness, 2007. "Forward induction and entry deterrence: an experiment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 183-209, October.
    8. Fudenberg, Drew & Tirole, Jean, 1989. "Noncooperative game theory for industrial organization: An introduction and overview," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 5, pages 259-327, Elsevier.
    9. Steffen Huck & Kai A. Konrad & Wieland Müller & Hans-Theo Normann, 2007. "The Merger Paradox and why Aspiration Levels Let it Fail in the Laboratory," Economic Journal, Royal Economic Society, vol. 117(522), pages 1073-1095, July.
    10. Roberts, Mark J & Tybout, James R, 1997. "Producer Turnover and Productivity Growth in Developing Countries," The World Bank Research Observer, World Bank, vol. 12(1), pages 1-18, February.
    11. Charles R. Plott, 1997. "Laboratory Experimental Testbeds: Application to the PCS Auction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(3), pages 605-638, September.
    12. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    13. Plott, Charles R. & Salmon, Timothy C., 2004. "The simultaneous, ascending auction: dynamics of price adjustment in experiments and in the UK3G spectrum auction," Journal of Economic Behavior & Organization, Elsevier, vol. 53(3), pages 353-383, March.
    14. Severin Borenstein & James Bushnell, 1999. "An Empirical Analysis of the Potential for Market Power in California’s Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
    15. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 53-82.
    16. Abbink, Klaus & Brandts, Jordi & McDaniel, Tanga, 2003. "Asymmetric Demand Information in Uniform and Discriminatory Call Auctions: An Experimental Analysis Motivated by Electricity Markets," Journal of Regulatory Economics, Springer, vol. 23(2), pages 125-144, March.
    17. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    18. Jordi Brandts & David J. Cooper, 2006. "A Change Would Do You Good .... An Experimental Study on How to Overcome Coordination Failure in Organizations," American Economic Review, American Economic Association, vol. 96(3), pages 669-693, June.
    19. Heath, Chip & Tversky, Amos, 1991. "Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
    20. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    21. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
    22. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
    23. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    24. Isaac, R Mark & Smith, Vernon L, 1985. "In Search of Predatory Pricing," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 320-345, April.
    25. Mueller, Dennis C., 1997. "First-mover advantages and path dependence," International Journal of Industrial Organization, Elsevier, vol. 15(6), pages 827-850, October.
    26. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Duffy, John & Jenkins, Brian C., 2024. "Search, unemployment, and the Beveridge curve: Experimental evidence," Labour Economics, Elsevier, vol. 87(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hans‐Theo Normann & Roberto Ricciuti, 2009. "Laboratory Experiments For Economic Policy Making," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 407-432, July.
    2. Alex Coad, 2007. "Firm Growth: a Survey," Post-Print halshs-00155762, HAL.
    3. Timothy Dunne & Shawn D. Klimek & Mark J. Roberts & Daniel Yi Xu, 2013. "Entry, exit, and the determinants of market structure," RAND Journal of Economics, RAND Corporation, vol. 44(3), pages 462-487, September.
    4. Marco Vivarelli, 2013. "Is entrepreneurship necessarily good? Microeconomic evidence from developed and developing countries," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 22(6), pages 1453-1495, December.
    5. Enrico Santarelli & Marco Vivarelli, 2007. "Entrepreneurship and the process of firms’ entry, survival and growth," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 16(3), pages 455-488, June.
    6. Daniel Fackler & Claus Schnabel & Joachim Wagner, 2013. "Establishment exits in Germany: the role of size and age," Small Business Economics, Springer, vol. 41(3), pages 683-700, October.
    7. Viktoria Kocsis & Victoria Shestalova & Henry van der Wiel & Nick Zubanov & Ruslan Lukach & Bert Minne, 2009. "Relation entry, exit and productivity: an overview of recent theoretical and empirical literature," CPB Document 180.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Yang, Qing Gong & Temple, Paul, 2012. "Reform and competitive selection in China: An analysis of firm exits," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 286-299.
    9. Jože P. Damijan & Črt Kostevc & Sašo Polanec, 2010. "From Innovation to Exporting or Vice Versa?," The World Economy, Wiley Blackwell, vol. 33(3), pages 374-398, March.
    10. Nicolas Berman & Vincent Rebeyrol & Vincent Vicard, 2019. "Demand Learning and Firm Dynamics: Evidence from Exporters," The Review of Economics and Statistics, MIT Press, vol. 101(1), pages 91-106, March.
    11. Geurts, Karen & Van Biesebroeck, Johannes, 2016. "Firm creation and post-entry dynamics of de novo entrants," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 59-104.
    12. Guidi, Francesco & Solomon, Edna & Trushin, Eshref & Ugur, Mehmet, 2015. "Inverted-U relationship between innovation and survival: Evidence from firm-level UK data," EconStor Preprints 110896, ZBW - Leibniz Information Centre for Economics.
    13. James E. Prieger, 2005. "The Impact of Cost Changes on Industry Dynamics," Working Papers 165, University of California, Davis, Department of Economics.
    14. Giulio Bottazzi & Giovanni Dosi & Nadia Jacoby & Angelo Secchi & Federico Tamagni, 2010. "Corporate performances and market selection: some comparative evidence," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 19(6), pages 1953-1996, December.
    15. Kersting, Stefan & Hüttel, Silke & Odening, Martin, 2015. "Structural change in agriculture under capacity constraints: An equilibrium approach," Thuenen-Series of Applied Economic Theory 140, University of Rostock, Institute of Economics.
    16. Michele Cincera, 2004. "Impact of market entry and exit on EU productivity and growth performance," ULB Institutional Repository 2013/921, ULB -- Universite Libre de Bruxelles.
    17. Lucia Foster & John Haltiwanger & Chad Syverson, 2016. "The Slow Growth of New Plants: Learning about Demand?," Economica, London School of Economics and Political Science, vol. 83(329), pages 91-129, January.
    18. Viktoria Kocsis & Victoria Shestalova & Henry van der Wiel & Nick Zubanov & Ruslan Lukach & Bert Minne, 2009. "Relation entry, exit and productivity: an overview of recent theoretical and empirical literature," CPB Document 180, CPB Netherlands Bureau for Economic Policy Analysis.
    19. Lilia Aleksanyan & Jean-Pierre Huiban, 2016. "Economic and financial determinants of firm bankruptcy: evidence from the French food industry," Review of Agricultural, Food and Environmental Studies, Springer, vol. 97(2), pages 89-108, September.
    20. Florin Maican & Matilda Orth, 2017. "Productivity Dynamics and the Role of ‘Big-Box’ Entrants in Retailing," Journal of Industrial Economics, Wiley Blackwell, vol. 65(2), pages 397-438, June.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:299. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bruno Guallar (email available below). General contact details of provider: https://edirc.repec.org/data/bargses.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.