The dominance of reputation in continuous time: Experimental insights from a market entry game

I construct a continuous-time market entry game to experimentally investigate whether continuous-time interaction increases the incumbent’s reputation compared to discrete-time interaction. In the model, entrants can build capacity up to a certain threshold in order to enter the market, while the incumbent can deter entry to influence the entrant’s decision. In continuous time, players can adjust their actions at any moment, whereas in discrete time, actions are limited to a few simultaneous moves. In the experiment, both games are repeated five times in a row with a fixed incumbent and changing entrants. Through the transmission of distinct information among subsequent entrants, the incumbent is able to build reputation throughout the game. In continuous time, the incumbent achieves a significantly higher reputation. Moreover, when considering reputation in a round-based view, it becomes evident that reputation reaches a high level already in the first round, whereas in discrete time, it takes about three rounds to develop. These insights can be attributed to enhanced information transfer in continuous time. Through frequent and endogenous action changes, the incumbent is able to send more and clearer entry-deterring signals.