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Explaining excess entry in winner-take-all markets

Vincent Laferriere, David Staubli and Christian Thoeni
Authors registered in the RePEc Author Service: Christian Thöni ()

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

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.

Keywords: Winner-take-all market; Market entry game; Excess entry; Cumulative Prospect Theory; Probability weighting; Experiment (search for similar items in EconPapers)
JEL-codes: C92 D81 D91 (search for similar items in EconPapers)
Pages: 61 pp.
Date: 2022-03
New Economics Papers: this item is included in nep-com, nep-exp and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:22.02

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