 Optimism, market entry and competitive deterrencePost-Print from HAL Abstract: I study a sequential entry game in a winner-take-all market where success depends on the relative quality of the project and where some entrepreneurs (but not all) overestimate the quality of their own project. For a potential early entrant, overestimating one's project quality (i.e., individual optimism) can have both negative and positive consequences: it fosters her incentive to enter, which can lead to excess entry but can also limit underentry (in markets where realistic entrepreneurs stay out); it can also help deter rivals. I show that the net gain of individual optimism for entrepreneurs with low-quality projects (i) depends on market potential (the market's capacity to provide positive payoffs for one or two entrepreneurial firms) and group-level optimism (the fraction of optimists vs. realists among entrepreneurs), (ii) is in general positive in low-potential markets where optimism helps deterring rivals with projects of higher quality, and (iii) is maximized at moderate levels of group-level optimism in low-potential markets and decreases with group-level optimism in high-potential markets. Finally, I show that overoptimistic beliefs are often persistent, particularly in low-potential markets, and that optimism (in comparison with realism) can facilitate learning. Keywords: optimism; overconfidence; market entry; deterrence; market potential (search for similar items in EconPapers) Published in 40th International Conference of the French Finance Association (AFFI), May 2024, Lille, France There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04747786 Access Statistics for this paper More papers in Post-Print from HAL |
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