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Who thinks about the competition? Managerial ability and strategic entry in US local telephone markets

Author

Listed:
  • Avi Goldfarb

    (Rotman School of Management, University of Toronto)

  • Mo Xiao

    (Eller College of Management, University of Arizona)

Abstract
This paper examines how manager and firm characteristics relate to entry decisions in US local telephone markets. To do so, it develops a structural econometric model that allows managers to be heterogeneous in their ability to correctly conjecture competitor behavior. The model adapts Camerer, Ho, and Chong’s (2004) Cognitive Hierarchy model to a real-world setting. We observe the industry in 1998, shortly after the Telecommunications Act of 1996 opened up the market. We find that older firms with older, more experienced managers have higher estimated levels of strategic ability. Managers with degrees in economics or business, and managers with graduate degrees, also have higher estimated levels of strategic ability. We find no evidence that university quality is related to ability. We repeat this exercise using data from 2000, 2002, and 2004. While the core results do not change, the overall level of measured strategic ability increases substantially by 2004. The estimates of strategic ability are also correlated with survival: those firms with lower estimated levels of ability are more likely to exit the industry early.

Suggested Citation

  • Avi Goldfarb & Mo Xiao, 2008. "Who thinks about the competition? Managerial ability and strategic entry in US local telephone markets," Working Papers 08-21, NET Institute, revised Oct 2008.
    • Handle: RePEc:net:wpaper:0821
    as

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    File URL: http://www.netinst.org/Goldfarb_Xiao_08-21.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    entry games; behavioral industrial organization; cognitive hierarchy; CLECs; local telephone competition;
    All these keywords.

    JEL classification:

    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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