Entry and Market Selection of Firms: A Laboratory Study

Jordi Brandts and Ayça E. Giritligil

(IAE, Barcelona)

General

• 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.”

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).

TABLE 2. COURNOT EQUILIBRIUM BENCHMARKS*

Treatment Fixed and Variable Costs

Equilibrium quantities Equilibrium total surplus

Seq-Sym10 FC = 15IMC = 1EMC = 1

Rounds 1-10: IQ= 20

Rounds 11-20: IQ=EQ=15

Rounds 21-30: IQ=EQ=12

Rounds 31-40: IQ=EQ=10

Rounds 1-10: 290

Rounds 11-20: 292.5

Rounds 21-30: 285.6

Rounds 31-40: 275

Simul-Sym10 FC = 15IMC = 1EMC = 1

Rounds 1-10: IQ=20

Rounds 11-40: IQ=EQ=10

Rounds 1-10: 290

Rounds 11-40: 275

Seq-Asym10 FC = 30IMC = 2EMC = 1

Rounds 1-10: IQ=30

Rounds 11-20: IQ=20, EQ=30

Rounds 21-30: IQ=0 EQ=33

Rounds 31-40: IQ=0, EQ=25

Rounds 1-10: 300

Rounds 11-20: 325

Rounds 21-30: 383.1

Rounds 31-40: 378.75

Simul-Asym10 FC = 30IMC = 2EMC = 1

Rounds 1-10: IQ=30

Rounds 11-40: EQ=25

Rounds 1-10: 300

Rounds 31-40: 378.75

Seq-Asym20 FC = 30 IMC = 2EMC = 1

Same as Seq-Asym10 Analogous to Seq-Asym10

Simul-Asym20 FC = 30IMC = 2EMC = 1

Same as Simul-Asym10 Analogous to Simul-Asym10

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 2: Average q (incumbents vs. entrants) for Treatment Simul-Sym10

0

5

10

15

20

25

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

q12(actual) q (potentials)

Figure 4: Average q (inefficient vs. efficient) and (actual vs. equ.) for Treatment Seq-Asym10

0

5

10

15

20

25

30

35

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.)

Figure 6: Average q (inefficient vs. efficient) and (actual vs equ) for Treatment Simul-Asym10

0

5

10

15

20

25

30

35

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

q(inef) q(ef) q(inef. equ) q(ef. equ)

Figure 9: Average q(inefficient vs. efficient) and (actual vs. equ.) for Treatment Seq-Asym20

0

5

10

15

20

25

30

35

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

rounds

q(inef) q(ef) q(inef. equ) q(ef. equ)

Figure 10: Average profits (inefficient vs. efficient) for Treatment Seq-Asym20

-30

-20

-10

0

10

20

30

40

50

60

70

80

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

rounds

profit(inef) profit(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 ?