Forward induction and the excess capacity puzzle: An experimental investigation
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schotter Andrew & Weigelt Keith & Wilson Charles, 1994.
"A Laboratory Investigation of Multiperson Rationality and Presentation Effects,"
Games and Economic Behavior,
Elsevier, vol. 6(3), pages 445-468, May.
- Schotter, Andrew & Weigelt, Keith & Wilson, Charles, 1990. "A Laboratory Investigation Of Multi-Person Rationality And Presentation Effects," Working Papers 90-24, C.V. Starr Center for Applied Economics, New York University.
- Drew Fudenberg & David K. Levine, 1996.
"The Theory of Learning in Games,"
Levine's Working Paper Archive
624, David K. Levine.
- Cabrales, Antonio, 2000.
"Stochastic Replicator Dynamics,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 451-81, May.
- Drew Fudenberg & David K. Levine, 1998.
"Learning in Games,"
Levine's Working Paper Archive
2222, David K. Levine.
- KOHLBERG, Elon & MERTENS, Jean-François, .
"On the strategic stability of equilibria,"
CORE Discussion Papers RP
716, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- van Damme, E.E.C., 1989.
"Stable equilibria and forward induction,"
Other publications TiSEM
bd598a8f-f017-4cab-a9ed-8, Tilburg University, School of Economics and Management.
- Brandts, Jordi & Holt, Charles A., 1995. "Limitations of dominance and forward induction: Experimental evidence," Economics Letters, Elsevier, vol. 49(4), pages 391-395, October.
- Mason, Charles F. & Nowell, Cliff, 1998. "An experimental analysis of subgame perfect play: the entry deterrence game," Journal of Economic Behavior & Organization, Elsevier, vol. 37(4), pages 443-462, December.
- Battigalli, Pierpaolo, 1996. "Strategic Rationality Orderings and the Best Rationalization Principle," Games and Economic Behavior, Elsevier, vol. 13(2), pages 178-200, April.
- Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
- Borgers, Tilman & Sarin, Rajiv, 1997.
"Learning Through Reinforcement and Replicator Dynamics,"
Journal of Economic Theory,
Elsevier, vol. 77(1), pages 1-14, November.
- Tilman Börgers & Rajiv Sarin, . "Learning Through Reinforcement and Replicator Dynamics," ELSE working papers 051, ESRC Centre on Economics Learning and Social Evolution.
- T. Borgers & R. Sarin, 2010. "Learning Through Reinforcement and Replicator Dynamics," Levine's Working Paper Archive 380, David K. Levine.
- Steffen Huck & Wieland Mueller, 1998.
"Perfect versus imperfect observability---An experimental test of Bagwell's result,"
- Huck, Steffen & Muller, Wieland, 2000. "Perfect versus Imperfect Observability--An Experimental Test of Bagwell's Result," Games and Economic Behavior, Elsevier, vol. 31(2), pages 174-190, May.
- Balkenborg, Dieter, 1994. "An Experiment on Forward- versus Backward Induction," Discussion Paper Serie B 268, University of Bonn, Germany.
- Cooper, Russell & De Jong, Douglas V. & Forsythe, Robert & Ross, Thomas W., 1992. "Forward induction in coordination games," Economics Letters, Elsevier, vol. 40(2), pages 167-172, October.
- Kyle Bagwell, 1992.
"Commitment and Observability in Games,"
1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Singh, Satwinder & Utton, Michael & Waterson, Michael, 1998. "Strategic behaviour of incumbent firms in the UK," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 229-251, March.
- Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215.
- Van Huyck John B. & Battalio Raymond C. & Beil Richard O., 1993. "Asset Markets as an Equilibrium Selection Mechanism: Coordination Failure, Game Form Auctions, and Tacit Communication," Games and Economic Behavior, Elsevier, vol. 5(3), pages 485-504, July.
- Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
- Dixit, Avinash, 1979.
"The Role of Investment in Entry-Deterrence,"
The Warwick Economics Research Paper Series (TWERPS)
140, University of Warwick, Department of Economics.
- Cooper, Russell & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1993. "Forward Induction in the Battle-of-the-Sexes Games," American Economic Review, American Economic Association, vol. 83(5), pages 1303-16, December.
- 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.
- Hauk, Esther & Hurkens, Sjaak, 2002.
"On Forward Induction and Evolutionary and Strategic Stability,"
Journal of Economic Theory,
Elsevier, vol. 106(1), pages 66-90, September.
- Esther Hauk & Sjaak Hurkens, 1999. "On forward induction and evolutionary and strategic stability," Economics Working Papers 408, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
- Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, March.
- Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:703. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.