BibTeX
@MISC{Jon06canbounded,
author = {Chloélecoq Jon and Thor Sturluson},
title = {Can Bounded Rationality Explain Excess Capacity? ∗},
year = {2006}
}
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Abstract
Excess capacity is observed in many markets especially those where a substantial initial investment is required. The theoretical literature often explains this feature by strategic attempts to deter entry or to limit new entrants ’ market shares but the empirical evidence for such a rationale is mixed. Moreover, excess capacity has also been observed in experimental studies on capacityconstrained games where there is no entry (and therefore no entry-deterrence motive). This paper explores experimentally another rationale for excess capacity: rather than (in addition to) being a threat to (potential) entrants, excess capacity held by incumbents may constitute a valuable option to reap extra gains from competition with an inexperienced entrant, if he turns out to makes a mistake. In our experimental design we used the level of experience (the number of periods played) as a proxy for the level of rationality and matched subjects with different levels of experience. We find evidence of excess capacity decreasing with opponent’s experience. ∗ This paper is a sustantially revised version of a chapter of Le Coq and Sturluson’s 2003 Stockholm School of Economics Ph.D. thesis. It was before circulated as "Does Opponent’s experience matter?". The authors would like to thank Tore Ellingsen for his insightful comments in the project’s infancy, Urs Fischbacher for allowig us tousethez-TreesoftwareandHans-TheoNorman for technical help. We thank also seminar participants at the IIOC 2004 (Chicago), EARIE 2003 (Lausanne), SAET 2003 (Rhodos) for helpful comments. We gratefully acknowledge financial
Keyphrases
excess capacity bounded rationality explain excess capacity stockholm school entry-deterrence motive le coq inexperienced entrant experience matter insightful comment new entrant market share tore ellingsen valuable option technical help substantial initial investment project infancy empirical evidence seminar participant different level strategic attempt helpful comment extra gain economics ph theoretical literature ur fischbacher matched subject experimental design many market experimental study opponent experience
