Forward induction and the excess capacity puzzle: An experimental investigation

Gary Charness, Antonio Cabrales and Jordi Brandts

No 76, Working Papers from Barcelona School of Economics

Abstract: While the theoretical industrial organization literature has long argued that excess capacity can be used to deter entry into markets, there is little empirical evidence that incumbent firms effectively behave in this way. Bagwell and Ramey (1996) propose a game with a specific sequence of moves and partially-recoverable capacity costs in which forward induction provides a theoretical rationalization for firm behavior in the field. We conduct an experiment with a game inspired by their work. In our data the incumbent tends to keep the market, in contrast to what the forward induction argument of Bagwell and Ramey would suggest. The results indicate that players perceive that the first mover has an advantage without having to pre-commit capacity. In our game, evolution and learning do not drive out this perception. We back these claims with data analysis, a theoretical framework for dynamics, and simulation results.

Keywords: Entry; excess capacity; forward induction; equilibrium selection; first-mover advantage (search for similar items in EconPapers)
JEL-codes: C70 C91 D42 L11 L12 (search for similar items in EconPapers)
Date: 2015-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Forward induction and the excess capacity puzzle: An experimental investigation (2003)
Working Paper: Forward induction and the excess capacity puzzle: An experimental investigation (2003)
Working Paper: Forward induction and the excess capacity puzzle: An experimental investigation (2003)
Working Paper: Forward induction and the excess capacity puzzle: An experimental investigation (2003)
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