An experimental analysis of subgame perfect play: The entry deterrence game

Article (PDF Available)inJournal of Economic Behavior & Organization 37(4):443-462 · December 1998with50 Reads
DOI: 10.1016/S0167-2681(98)00113-9
Our experiments model a two-stage, two person non-cooperative game where subjects face a sequence of potential entry situations. Payoffs and entry costs are common knowledge. The subgame perfect equilibrium entails player I choosing an entry barring output and player E not entering. While many subjects played this way, a significant proportion of E players entered when it yielded negative net payoffs, and a non-trivial proportion of I players didn't seek deterrence. While these proportions fall over the course of the experiment, such behavior persists through the final period. Past experience influences I subjects' tendencies to seek deterrence.


    • "Our modeling approach also has structural similarities to strategic entry deterrence games in industrial organization where the first movers are firms trying to protect their market shares (by using advertising, reputation, patents or product variety) and the second mover is a potential entrant. 5 The use of laboratory experimental methods connects our research to a limited experimental literature on entry deterrence (Jung et al. 1994; Mason and Nowell 1998; Brandts et al. 2005). Jung et al. (1994) examine the decisions of a monopolist that can adopt a 'strong' or 'weak' pricing strategy in the presence of entry by a series of subjects. "
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    • "Taking this approach, Mathis and Koscianski (1997) find that an expansion of capacity by incumbents decreased the probability of entry in the U.S. titanium metal industry. Laboratory experiments by Mason and Nowell (1998) and Mason and Phillips (2000) provide additional support for using excess capacity as an entry-deterrent strategy. Despite these empirical examples and the large theoretical literature, empirical support for excess capacity as a strategic deterrent to entry is relatively rare. "
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    • "The latter avenue of research tests the preemptive actions of dominant (high-performing) firms in attempting to increase their market power over potential new entrants or rival incumbents. Industrial organization theory has examined related issues using game theoretic approaches (Mason and Nowell, 1998 ) and simulation methodologies addressing the dynamics among strategy dimensions may reveal notable exceptions to extant knowledge in this area. Second, prospect theory (Kahneman and Tversky, 1979) presents researchers with a suitable workbench upon which to examine the strategy – performance relationship. "
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