Induction vs. Deterrence in the Chain Store Game: How Many Potential Entrants are Needed to Deter Entry?

Abstract

We report the results of two experiments designed to test competitively the induction against the deterrence theory in Selten’s (1978) chain store game with complete and perfect information. Our major purpose is to determine the number of entrants (m) needed for rendering the deterrence argument effective. Our results show that if we increase m from 10 to 15, support for the deterrence theory increases significantly. But even with m=15, the aggressive behavior of the incumbent does not deter most entrants. We then compare these results with previous studies of the chain store game allowing for incomplete information, several choices by the same entrant, and multiple iterations of the game.