Innovation, Entry into Multiple Markets and Unobserved Heterogeneity

Abstract

This paper considers an experimental market entry game, where the decision problem involves several heterogeneous markets and players have an opportunity to enter several markets simultaneously. We find that groups fail to coordinate on any of the multiple pure strategy Nash equilibria by exhibiting excess entry in the majority of rounds. The likelihood of overentry depends on the market capacity and characteristics of the experimental markets. We also find that, on average, the behavior of the individual participants can be reconciled with the mixed strategy equilibrium prediction. Yet, this prediction fails to account for the differences in the individual profiles. By conducting an econometric estimation that accounts for the unobserved heterogeneity, we show that market capacity, expectations about the number of entrants, the amount of payoff from the previous period and the history of over- or underentry have significant impact on the individual action choice.

Keywords: market entry games, coordination failure, unobserved heterogeneity

JEL Classification: C72, C92, D83, D91