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Forward induction and the excess capacity puzzle: An experimental investigation


  • Jordi Brandts
  • Antonio Cabrales
  • Gary Charness


While the theoretical industrial organization literature has long argued that excess capacity can be used to deter entry into markets, there is little empirical evidence that incumbent firms effectively behave in this way. Bagwell and Ramey (1996) propose a game with a specific sequence of moves and partially-recoverable capacity costs in which forward induction provides a theoretical rationalization for firm behavior in the field. We conduct an experiment with a game inspired by their work. In our data the incumbent tends to keep the market, in contrast to what the forward induction argument of Bagwell and Ramey would suggest. The results indicate that players perceive that the first mover has an advantage without having to pre-commit capacity. In our game, evolution and learning do not drive out this perception. We back these claims with data analysis, a theoretical framework for dynamics, and simulation results.

Suggested Citation

  • Jordi Brandts & Antonio Cabrales & Gary Charness, 2003. "Forward induction and the excess capacity puzzle: An experimental investigation," Working Papers 76, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:76

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    References listed on IDEAS

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    Cited by:

    1. Antonio Cabrales & Antoni Calvó-Armengol, 2003. "Corporate Downsizing to Rebuild Team Spirit," Working Papers 183, Barcelona Graduate School of Economics.
    2. Charness, Gary & Grosskopf, Brit, 2004. "What makes cheap talk effective? Experimental evidence," Economics Letters, Elsevier, vol. 83(3), pages 383-389, June.

    More about this item


    Entry; excess capacity; forward induction; equilibrium selection; first-mover advantage;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies


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