Who Thinks about the Competition? Managerial Ability and Strategic Entry in US Local Telephone Markets

42 Pages Posted: 18 Oct 2008

See all articles by Avi Goldfarb

Avi Goldfarb

University of Toronto - Rotman School of Management

Mo Xiao

University of Arizona - Eller College of Management - Department of Economics

Date Written: September 2008

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.

Keywords: entry games, behavioral industrial organization, cognitive hierarchy

Suggested Citation

Goldfarb, Avi and Xiao, Mo, Who Thinks about the Competition? Managerial Ability and Strategic Entry in US Local Telephone Markets (September 2008). NET Institute Working Paper No. 08-21. Available at SSRN: https://ssrn.com/abstract=1286240 or http://dx.doi.org/10.2139/ssrn.1286240

Avi Goldfarb (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

Mo Xiao

University of Arizona - Eller College of Management - Department of Economics ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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