Abstract
We analyze the impact of overconfidence on the timing of entry in markets, profits, and welfare using an extension of the quantity commitment game. Players have private information about costs, one player is overconfident, and the other one rational. We find that for slight levels of overconfidence and intermediate cost asymmetries, there is a unique cost-dependent equilibrium where the overconfident player has a higher ex-ante probability of being the Stackelberg leader. Overconfidence lowers the profit of the rational player but can increase that of the overconfident player. Consumer rents increase with overconfidence while producer rents decrease which leads to an ambiguous welfare effect.
Highlights
This paper studies the impact of overconfidence—one of the most robust biases in judgment—on the timing of entry into a market
We characterize the impact of overconfidence on the timing of entry in a market, profits, and welfare
In a cost-dependent equilibrium, the overconfident player has a higher ex-ante probability of being the Stackelberg leader than the rational player
Summary
This paper studies the impact of overconfidence—one of the most robust biases in judgment—on the timing of entry into a market. To study the impact of overconfidence on the timing of entry into a market, we use [9]’s extension of [1]’s quantity commitment game. In this endogenous timing model, two players are privately informed about their cost (which can be either high or low), compete in quantities, and must decide whether to enter a market at date 1 or at date 2. We show that in the unique cost-dependent equilibrium of the model, a moderately overconfident player has a higher ex-ante probability of being the market leader.
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