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Ambiguous information and market entry

Ambiguous information and market entry. Jordi Brandts and Lan Yao (IAE&UAB, Barcelona) July 30, 2007. Motivation. Defining ambiguity: “ambiguity is uncertainty about probability, created by missing information that is relevant and could be known.” Frisch and Baron(1988)

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Ambiguous information and market entry

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  1. Ambiguous information and market entry Jordi Brandts and Lan Yao (IAE&UAB, Barcelona) July 30, 2007

  2. Motivation • Defining ambiguity: • “ambiguity is uncertainty about probability, created by missing information that is relevant and could be known.” Frisch and Baron(1988) • Many researchers have found evidence of ambiguity aversion. • Ellsberg paradox; Sarin and Weber (1993); • One recent study finds ambiguity seeking. • Chen, Katuscak and Ozdenoren (2006) • There are several ways in which information can be missing. We study ambiguity as unknown probability about market capacity.

  3. Motivation • Why study ambiguity in market entry problem? • We are interested in ambiguity in strategic environments; • Empirical evidence of over entry and high rate of business failure is hard to explain; • Market capacity uncertainty is more an ambiguous situation than a risky one.

  4. Experimental Design • One Market Entry Game • 5 potential entrants; π = 6 payoff if stay out; π = 6 + 2 (c – n ) payoff if enter; • c: market capacity, n: actual entrants. • 50 periods; • The vector of realizations of c same for risk and ambiguity.

  5. Experimental Design • Procedure: • all the subjects make decisions at the same time; • in risk or ambiguity situation, c is not informed neither at the beginning nor in the end of the period; • the only information feedback they received is their own payoff.

  6. MSNE 2.6 Experimental Result • 5 rounds smoothed line of average number of entrants for 50 periods

  7. Experimental Result

  8. Experimental Result • We extend our design to three cases with two markets; • One market with certain capacity, the other with risky capacity; • One market with certain capacity, the other with ambiguous capacity; • One market with risky capacity, the other with ambiguous capacity; • And also study random vs. fixed matching. • Most previous work uses fixed matching, but both random and fixed make economic sense.

  9. Experimental ResultsAggregate results • Observation1: in both one market and two markets cases, entrant number in ambiguous market is higher than that in risky market. • Observation 2: over entry happened in all markets. However entrant number in certain market is always less than that in risky or ambiguous market when they are present at the same time. • Observation 3: entrant number is higher in fixed matching than in the random matching.

  10. Summary • We find clear evidence of ambiguity seeking; • Two explanations of excess entry; • Overconfidence about relative ability, Camerer and Lovallo (1999); • Self-assessed competence, overconfidence plays no roles, Grieco and Hogarth (2006); • Our results suggest a new factor---ambiguity seeking--- may be behind observed over entry into markets.

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