Decomposing the Congestion Effect and the Inference Effect of Competition: A Field Experiment
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SSRN-id1084995.pdf
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Author(s)
Tucker, Catherine
Zhang, Juanjuan
Date Issued
November 18, 2007
Publisher
Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology
Series/Report no.
MIT Sloan School of Management Working Paper;4678-08
Abstract
Are firms more or less likely to enter a market if they observe that competitors have
entered? This most basic question has received contradictory empirical answers. The
normative recommendation to firms that make entry decisions is therefore ambiguous.
We reconcile this controversy by introducing demand uncertainty as a moderator of
how entrants respond to existing competition. We distinguish between two effects
of competition on entry decisions: a negative “congestion effect,” where competition
dissipates profit when demand is fixed and is known, and a positive “inference effect,”
where firms infer high demand from a large number of competitors. To tease apart these
two effects empirically, we use field experiment data from a website that brings together
buyers and sellers of used goods. Before each potential seller made a posting request,
the website randomized whether to disclose the number of buyers and/or sellers, and
the exact number to disclose. We find evidence for a positive inference effect: When
the number of buyers is not disclosed, the overall effect of the number of sellers on
entry is neutral; when the number of buyer is disclosed, however, a larger number of
sellers lowers the entry propensity due to the congestion effect. We discuss how our
results should affect the information disclosure strategies of two-sided platforms.
Subjects
Competition
Entry
Inference
Congestion
Decision-making Under Uncertainty
Two-Sided Platform Strategies
Persistent DSpace Link
