Entry and market selection of firms: A laboratory study

Abstract

We study competition in experimental markets in which two incumbents face entry by three other firms. Our treatments vary with respect to three factors: sequential vs. block or simultaneous entry, the cost functions of entrants and the amount of time during which incumbents are protected from entry. Before entry incumbents are able to collude in all cases. When all firms' costs are the same entry always leads consumer surplus and profits to their equilibrium levels. When entrants are more efficient than incumbents, entry leads consumer surplus to equilibrium. However, total profits remain below equilibrium, due to the fact that the inefficient incumbents produce too much and efficient entrants produce too little. Market behavior is satisfactory from the consumers' standpoint, but does not yield adequate signals to other potential entrants. These results are not affected by whether entry is simultaneous or sequential. The length of the incumbency phase does have some subtle effects.

Search, unemployment, and the Beveridge curve: Experimental evidence

“…We are not aware of any empirical or experimental research that directly addresses such firm behavior. There are some related experimental studies of firm investments in market capacity, but there the focus is on deterring entry by rival firms, see, e.g., Brandts, Cabrales and Charness (2007) and Brandts and Giritligil (2008). These studies differ from the DMP framework we use, where firms do not choose production capacity or decide sequentially whether to enter an industry.…”