Forward induction and the excess capacity puzzle: An experimental investigation

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Economic Theory, forthcoming
To cite or link this document: Brandts, Jordi Cabrales, Antonio Charness, Gary
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa 2003-07-01
dc.identifier.citation Economic Theory, forthcoming
dc.description.abstract While the theoretical industrial organization literature has long argued that excess capacity can be used to deter entry into markets, there is little empirical evidence that incumbent firms effectively behave in this way. Bagwell and Ramey (1996) propose a game with a specific sequence of moves and partially-recoverable capacity costs in which forward induction provides a theoretical rationalization for firm behavior in the field. We conduct an experiment with a game inspired by their work. In our data the incumbent tends to keep the market, in contrast to what the forward induction argument of Bagwell and Ramey would suggest. The results indicate that players perceive that the first mover has an advantage without having to pre-commit capacity. In our game, evolution and learning do not drive out this perception. We back these claims with data analysis, a theoretical framework for dynamics, and simulation results.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 703
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.title Forward induction and the excess capacity puzzle: An experimental investigation
dc.type info:eu-repo/semantics/workingPaper 2014-06-03T07:14:09Z
dc.subject.keyword Behavioral and Experimental Economics
dc.subject.keyword Microeconomics
dc.subject.keyword entry
dc.subject.keyword excess
dc.subject.keyword capacity
dc.subject.keyword forward induction
dc.subject.keyword equilibrium selection
dc.subject.keyword first-mover advantage
dc.subject.keyword leex
dc.rights.accessRights info:eu-repo/semantics/openAccess

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