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Explaining excess entry in winner-take-all markets

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  • 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
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    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

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