Explaining Excess Entry in Winner-Take-All Markets

Vincent Laferrière (), David Staubli () and Christian Thöni
Additional contact information
Vincent Laferrière: University of Lausanne, FDCA, CH-1015 Lausanne, Switzerland
David Staubli: Swiss Federal Tax Administration, CH-3003 Bern, Switzerland

Management Science, 2023, vol. 69, issue 2, 1050-1069

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 is instead 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.

Keywords: winner-take-all market; market entry game; excess entry; cumulative prospect theory; probability weighting; experiment (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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http://dx.doi.org/10.1287/mnsc.2022.4397 (application/pdf)

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Working Paper: Explaining excess entry in winner-take-all markets (2022)
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