IDEAS home Printed from https://ideas.repec.org/p/lau/crdeep/22.02.html
   My bibliography  Save this paper

Explaining excess entry in winner-take-all markets

Author

Listed:
  • Vincent Laferriere
  • David Staubli
  • Christian Thoeni

Abstract

We report experimental data from standard market entry games and winner-take-all games. At odds with traditional decision making models with risk aversion, the winner-take-all condition results in substantially more entry than the expected-payoff-equivalent market entry game. We explore three candidate explanations for excess entry: blind spot, illusion of control, and joy of winning, none of which receive empirical support. We provide a novel theoretical explanation for excess entry based on Cumulative Prospect Theory and test it empirically. Our results suggest that excess entry into highly competitive environments is not caused by a genuine preference for competing, but driven by probability weighting. Market entrants overweight the small probabilities associated with the high payoff outcomes in winner-take-all markets, while they underweight probable failures.

Suggested Citation

  • Vincent Laferriere & David Staubli & Christian Thoeni, 2022. "Explaining excess entry in winner-take-all markets," Cahiers de Recherches Economiques du Département d'économie 22.02, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:22.02
    as

    Download full text from publisher

    File URL: http://www.unil.ch/de/files/live/sites/de/files/working-papers/22.02.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Quang Nguyen & Marie Claire Villeval & Hui Xu, 2016. "Trust under the Prospect Theory and Quasi-Hyperbolic Preferences: A Field Experiment in Vietnam," Economic Development and Cultural Change, University of Chicago Press, vol. 64(3), pages 545-572.
    2. Simon Gächter & Elke Renner, 2010. "The effects of (incentivized) belief elicitation in public goods experiments," Experimental Economics, Springer;Economic Science Association, vol. 13(3), pages 364-377, September.
    3. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-245, September.
    4. Moore, Don A. & Cain, Daylian M., 2007. "Overconfidence and underconfidence: When and why people underestimate (and overestimate) the competition," Organizational Behavior and Human Decision Processes, Elsevier, vol. 103(2), pages 197-213, July.
    5. Armantier, Olivier & Treich, Nicolas, 2013. "Eliciting beliefs: Proper scoring rules, incentives, stakes and hedging," European Economic Review, Elsevier, vol. 62(C), pages 17-40.
    6. Thomas Astebro & Holger Herz & Ramana Nanda & Roberto A. Weber, 2014. "Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 49-70, Summer.
    7. Lattimore, Pamela K. & Baker, Joanna R. & Witte, Ann D., 1992. "The influence of probability on risky choice: A parametric examination," Journal of Economic Behavior & Organization, Elsevier, vol. 17(3), pages 377-400, May.
    8. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2002. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Journal of Economic Theory, Elsevier, vol. 104(1), pages 247-272, May.
    9. Philip Brookins & Dmitry Ryvkin, 2014. "An experimental study of bidding in contests of incomplete information," Experimental Economics, Springer;Economic Science Association, vol. 17(2), pages 245-261, June.
    10. Ulrich Schmidt & Horst Zank, 2008. "Risk Aversion in Cumulative Prospect Theory," Management Science, INFORMS, vol. 54(1), pages 208-216, January.
    11. Cason, Timothy N. & Masters, William A. & Sheremeta, Roman M., 2020. "Winner-take-all and proportional-prize contests: Theory and experimental results," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 314-327.
    12. Dohmen, Thomas & Falk, Armin & Fliessbach, Klaus & Sunde, Uwe & Weber, Bernd, 2011. "Relative versus absolute income, joy of winning, and gender: Brain imaging evidence," Journal of Public Economics, Elsevier, vol. 95(3), pages 279-285.
    13. Amnon Rapoport & Darryl A. Seale & Ido Erev & James A. Sundali, 1998. "Equilibrium Play in Large Group Market Entry Games," Management Science, INFORMS, vol. 44(1), pages 119-141, January.
    14. Glenn Harrison & E. Rutström, 2009. "Expected utility theory and prospect theory: one wedding and a decent funeral," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 133-158, June.
    15. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
    16. Ben Greiner, 2015. "Subject pool recruitment procedures: organizing experiments with ORSEE," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 1(1), pages 114-125, July.
    17. Adrian Bruhin & Helga Fehr-Duda & Thomas Epper, 2010. "Risk and Rationality: Uncovering Heterogeneity in Probability Distortion," Econometrica, Econometric Society, vol. 78(4), pages 1375-1412, July.
    18. Sheremeta, Roman M., 2010. "Experimental comparison of multi-stage and one-stage contests," Games and Economic Behavior, Elsevier, vol. 68(2), pages 731-747, March.
    19. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    20. Fischbacher, Urs & Thöni, Christian, 2008. "Excess entry in an experimental winner-take-all market," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 150-163, July.
    21. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
    22. Brünner, Tobias & Reiner, Jochen & Natter, Martin & Skiera, Bernd, 2019. "Prospect theory in a dynamic game: Theory and evidence from online pay-per-bid auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 215-234.
    23. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    24. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    25. Sundali, James A. & Rapoport, Amnon & Seale, Darryl A., 1995. "Coordination in Market Entry Games with Symmetric Players," Organizational Behavior and Human Decision Processes, Elsevier, vol. 64(2), pages 203-218, November.
    26. Jonathan F Schulz & Christian Thöni, 2016. "Overconfidence and Career Choice," PLOS ONE, Public Library of Science, vol. 11(1), pages 1-8, January.
    27. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
    28. Pamela K. Lattimore & Joanna R. Baker & A. Dryden Witte, 1992. "The Influence Of Probability on Risky Choice: A parametric Examination," NBER Technical Working Papers 0081, National Bureau of Economic Research, Inc.
    29. Christiane Ernst & Christian Thöni, 2013. "Bimodal Bidding in Experimental All-Pay Auctions," Games, MDPI, vol. 4(4), pages 1-16, October.
    30. Emmanuel Dechenaux & Dan Kovenock & Roman Sheremeta, 2015. "A survey of experimental research on contests, all-pay auctions and tournaments," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 609-669, December.
    31. Bruhin, Adrian & Santos-Pinto, Luís & Staubli, David, 2018. "How do beliefs about skill affect risky decisions?," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 350-371.
    32. Brian Albert Monroe, 2020. "The statistical power of individual-level risk preference estimation," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 6(2), pages 168-188, December.
    33. John Morgan & Henrik Orzen & Martin Sefton & Dana Sisak, 2016. "Strategic and Natural Risk in Entrepreneurship: An Experimental Study," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 420-454, April.
    34. Luisa Herbst, 2016. "Who Pays to Win Again? The Joy of Winning in Contest Experiments," Working Papers tax-mpg-rps-2016-06, Max Planck Institute for Tax Law and Public Finance.
    35. Danz, David, 2020. "Never underestimate your opponent: Hindsight bias causes overplacement and overentry into competition," Games and Economic Behavior, Elsevier, vol. 124(C), pages 588-603.
    36. Helga Fehr-Duda & Thomas Epper, 2012. "Probability and Risk: Foundations and Economic Implications of Probability-Dependent Risk Preferences," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 567-593, July.
    37. Daylian M. Cain & Don A. Moore & Uriel Haran, 2015. "Making sense of overconfidence in market entry," Strategic Management Journal, Wiley Blackwell, vol. 36(1), pages 1-18, January.
    38. Wright, William F. & Aboul-Ezz, Mohamed E., 1988. "Effects of extrinsic incentives on the quality of frequency assessments," Organizational Behavior and Human Decision Processes, Elsevier, vol. 41(2), pages 143-152, April.
    39. Sheremeta, Roman, 2016. "Impulsive Behavior in Competition: Testing Theories of Overbidding in Rent-Seeking Contests," MPRA Paper 73731, University Library of Munich, Germany.
    40. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    41. Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, vol. 115(503), pages 305-318, April.
    42. Anna Dorfman & Yoella Bereby-Meyer & Simone Moran, 2013. "When Feeling Skillful Impairs Coordination in a Lottery Selection Task," PLOS ONE, Public Library of Science, vol. 8(6), pages 1-6, June.
    43. Benedikt Herrmann & Henrik Orzen, 2008. "The appearance of homo rivalis: Social preferences and the nature of rent seeking," Discussion Papers 2008-10, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    44. Helga Fehr-Duda & Manuele Gennaro & Renate Schubert, 2006. "Gender, Financial Risk, and Probability Weights," Theory and Decision, Springer, vol. 60(2), pages 283-313, May.
    45. Brian Wu & Anne Marie Knott, 2006. "Entrepreneurial Risk and Market Entry," Management Science, INFORMS, vol. 52(9), pages 1315-1330, September.
    46. Quang Nguyen & Marie Claire Villeval & Hui Xu, 2016. "Trust and Trustworthiness under the Prospect Theory: A field experiment in Vietnam," Post-Print halshs-01182752, HAL.
    47. Thomas Åstebro & José Mata & Luís Santos-Pinto, 2015. "Skewness seeking: risk loving, optimism or overweighting of small probabilities?," Theory and Decision, Springer, vol. 78(2), pages 189-208, February.
    48. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    49. Fehr-Duda, Helga & Epper, Thomas & Bruhin, Adrian & Schubert, Renate, 2011. "Risk and rationality: The effects of mood and decision rules on probability weighting," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1-2), pages 14-24, April.
    50. Chen, Daniel L. & Schonger, Martin & Wickens, Chris, 2016. "oTree—An open-source platform for laboratory, online, and field experiments," Journal of Behavioral and Experimental Finance, Elsevier, vol. 9(C), pages 88-97.
    51. Kerim Keskin, 2016. "Equilibrium Notions for Agents with Cumulative Prospect Theory Preferences," Decision Analysis, INFORMS, vol. 13(3), pages 192-208, September.
    52. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
    53. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
    54. Metzger, Lars Peter & Rieger, Marc Oliver, 2019. "Non-cooperative games with prospect theory players and dominated strategies," Games and Economic Behavior, Elsevier, vol. 115(C), pages 396-409.
    55. Don A. Moore & John M. Oesch & Charlene Zietsma, 2007. "What Competition? Myopic Self-Focus in Market-Entry Decisions," Organization Science, INFORMS, vol. 18(3), pages 440-454, June.
    56. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xie, Yu & Wu, Desheng, 2024. "How does competition policy affect enterprise digitization? Dual perspectives of digital commitment and digital innovation," Journal of Business Research, Elsevier, vol. 178(C).
    2. Xia Chen & Yucheng Dong & Ying He, 2024. "Group Risky Choice and Resource Allocation Under Social Comparison Effects," Group Decision and Negotiation, Springer, vol. 33(5), pages 977-1017, October.
    3. Thomas Astebro & Frank Fossen & Cédric Gutierrez, 2024. "Entrepreneurs: Clueless, Biased, Poor Heuristics, or Bayesian Machines?," Working Papers hal-04759301, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bruhin, Adrian & Santos-Pinto, Luís & Staubli, David, 2018. "How do beliefs about skill affect risky decisions?," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 350-371.
    2. Anthony Newell, 2020. "Is your heart weighing down your prospects? Interoception, risk literacy and prospect theory," QuBE Working Papers 058, QUT Business School.
    3. Thomas Epper & Helga Fehr-Duda & Adrian Bruhin, 2011. "Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting," Journal of Risk and Uncertainty, Springer, vol. 43(3), pages 169-203, December.
    4. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    5. Eyal Baharad & Doron Kliger, 2013. "Market failure in light of non-expected utility," Theory and Decision, Springer, vol. 75(4), pages 599-619, October.
    6. Kpegli, Yao Thibaut & Corgnet, Brice & Zylbersztejn, Adam, 2023. "All at once! A comprehensive and tractable semi-parametric method to elicit prospect theory components," Journal of Mathematical Economics, Elsevier, vol. 104(C).
    7. Cheung, Stephen L. & Johnstone, Lachlan, 2017. "True Overconfidence, Revealed through Actions: An Experiment," IZA Discussion Papers 10545, Institute of Labor Economics (IZA).
    8. Chowdhury, Subhasish M. & Sheremeta, Roman M. & Turocy, Theodore L., 2014. "Overbidding and overspreading in rent-seeking experiments: Cost structure and prize allocation rules," Games and Economic Behavior, Elsevier, vol. 87(C), pages 224-238.
    9. Daniel Woods & Mustafa Abdallah & Saurabh Bagchi & Shreyas Sundaram & Timothy Cason, 2022. "Network defense and behavioral biases: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 254-286, February.
    10. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
    11. Miles S. Kimball & Collin B. Raymond & Jiannan Zhou & Junya Zhou & Fumio Ohtake & Yoshiro Tsutsui, 2024. "Happiness Dynamics, Reference Dependence, and Motivated Beliefs in U.S. Presidential Elections," NBER Working Papers 32078, National Bureau of Economic Research, Inc.
    12. Víctor González-Jiménez, 2021. "Incentive contracts when agents distort probabilities," Vienna Economics Papers vie2101, University of Vienna, Department of Economics.
    13. Fehr-Duda, Helga & Epper, Thomas & Bruhin, Adrian & Schubert, Renate, 2011. "Risk and rationality: The effects of mood and decision rules on probability weighting," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1), pages 14-24.
    14. Zahra Murad & Martin Sefton & Chris Starmer, 2016. "How do risk attitudes affect measured confidence?," Journal of Risk and Uncertainty, Springer, vol. 52(1), pages 21-46, February.
    15. Peter Brooks & Simon Peters & Horst Zank, 2014. "Risk behavior for gain, loss, and mixed prospects," Theory and Decision, Springer, vol. 77(2), pages 153-182, August.
    16. Kairies-Schwarz, Nadja & Kokot, Johanna & Vomhof, Markus & Weßling, Jens, 2017. "Health insurance choice and risk preferences under cumulative prospect theory – an experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 374-397.
    17. Víctor González-Jiménez, 2021. "Incentive contracts when agents distort probabilities," Vienna Economics Papers 2101, University of Vienna, Department of Economics.
    18. George Wu & Alex B. Markle, 2008. "An Empirical Test of Gain-Loss Separability in Prospect Theory," Management Science, INFORMS, vol. 54(7), pages 1322-1335, July.
    19. Cédric Gutierrez & Thomas Åstebro & Tomasz Obloj, 2020. "The Impact of Overconfidence and Ambiguity Attitude on Market Entry," Organization Science, INFORMS, vol. 31(2), pages 308-329, March.
    20. Ariane Charpin, 2018. "Tests des modèles de décision en situation de risque. Le cas des parieurs hippiques en France," Revue économique, Presses de Sciences-Po, vol. 69(5), pages 779-803.

    More about this item

    Keywords

    Winner-take-all market; Market entry game; Excess entry; Cumulative Prospect Theory; Probability weighting; Experiment;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lau:crdeep:22.02. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christina Seld (email available below). General contact details of provider: https://edirc.repec.org/data/deelsch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.