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Entry and Market Selection of Firms: A Laboratory Study. Jordi Brandts and Ayça E. Giritligil (IAE, Barcelona). What is it? A study of how incumbent firms adjust to the entry of new firms. In our context incumbents will have no strategic advantage. Why did we do it?
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Entry and Market Selection of Firms: A Laboratory Study Jordi Brandts and Ayça E. Giritligil (IAE, Barcelona)
What is it? A study of how incumbent firms adjust to the entry of new firms. In our context incumbents will have no strategic advantage. Why did we do it? Essential for good workings of a market economy: “Newcomers have to be able to capture a part of the market and more efficient firms have to displace less efficient ones.” General
Design • Quantity competition. • Two incumbents and three entrants. • Six treatments which vary: • The length of the incumbency phase. • Block vs. Sequential entry. • Entrants are either equally efficient as or more efficient than the incumbents (there is a fixed cost).
Results • Regularity 1: When firms are identical consumer and total surplus reach equilibrium levels after enough entry. When incumbents are less efficient than entrants consumer surplus tend to equilibrium but total surplus remains considerably below equilibrium. These results are independent of whether entry is sequential or simultaneous and of the length of the incumbency phase. • Regularity 2: When firms are identical incumbents are not able to hold on to a larger than equilibrium market share. When incumbents are less efficient than entrants, incumbents’ post-entry actual market shares are significantly larger than in equilibrium. • Regularity 3: Whether entry is simultaneous or sequential has no effect on consumer surplus, total surplus and incumbent market shares. • Regularity 4: A shorter incumbency phase leads to lower consumer surplus and higher profits in rounds 21-30 after first entry. It has a significantly negative impact on incumbents’ market in rounds 11-20 and to a significantly positive impact in rounds 21-30.
Figure 4: Average q (inefficient vs. efficient) and (actual vs. equ.) for Treatment Seq-Asym10 35 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 rounds average q(inef.) average q(ef.) equ. q(inef.) equ. q(ef.)
Summary • Sym treatments: firms at equilibrium. • Asym treatments incumbents produce more and entrants less than in eq. • Market selection of firms works,but with some “turbulence.” • Fights for the market lead to production inefficiencies, but consumers not hurt. • Explanation: Overconfidence ?, Aspiration levels ?
