38 Pages Posted: 12 Jul 2007 Last revised: 19 Sep 2008
Date Written: April 2008
Some managers are better than others. Based on the cognitive hierarchy framework of Camerer, Ho, and Chong (2004), the authors develop a structural econometric model that estimates the level of strategic thinking. In the model, firms with a high level of strategic thinking are more likely to correctly conjecture the expected actions of their competitors. The authors apply this model to decisions by managers at 2,233 Internet Service Providers to offer their customers access through 56K modems in 1997. The model is validated by showing that firms with a higher estimated probability of strategic thinking were more likely to have survived through April 2007. The estimation results show considerable heterogeneity in the degree to which firms behave strategically and suggest that strategic ability affects marketing outcomes: a simulated increase in strategic ability means that fewer firms offer the technology to their customers.
Keywords: behavioral game theory, empirical industrial organization, technology diffusion, Internet service providers, cognitive hierarchy
JEL Classification: D21, L86
Suggested Citation: Suggested Citation