lOMoARcPSD|835417
ArticleSummariesGamesandStrategy
Week1:Gibbons(1997)–IntroductiontoApplicableGameTheory
Game theory consist of simulations of strategic decisions that actors have to make based on their
information and risk and time preferences. It is useful to analyse competition in market entry
situations.Gibbonsdistinguishesfourtypesofgames,inwhichcompleteinformationmeansthatthere
is no private information on timing and feasible moves. Static games refer to simultaneousmove
gamesanddynamicgamesreferstosequentialmovegames.
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Staticgameswithcompleteinformation
Dynamicgameswithcompleteinformation
Staticgameswithincompleteinformation
Dynamicgameswithincompleteinformation
ANashequilibriumisthe courseofactionsinwhichnoplayerwantstodeviatefromtheoutcome
payoff(selfenforcing).NoteverygamehasapureNashequilibrium,incasemixedstrategiesshould
be applied. Games can also have multiple Nash equilibria. An application of a static game with
completeinformationisCournot’sduopolymodelforcompetition.Dynamicgameswithasequential
elementcan often be solved using backwardinduction,resultinginaNashequilibrium.Tofind all
equilibriaalsoallnoncrediblethreatshavetobetakenintoaccount.TofindsubgameperfectNash
equilibria,thesubgameshavetobeanalysed.
Whengamesarerepeated,peopletakefuturecooperationorpunishmentintoaccountintheircurrent
actions.Thereisadistinctionbetweenfiniteandinfinitelyrepeatedgames,focussedontheendpoint.
FinitelyrepeatedgamesareplayedNtimeswithasubgameperfectNashequilibriumineverygame
(doesn’thavetobeplayedthough).Infinitelyrepeatedgamesdependontriggerstrategies.Thismeans
playerscanchoosetocooperateconditionallyonotherplayerscooperation.Anoncooperativeaction
triggers to deviate from cooperating in future games. Also a discount factor values future payoffs
accountto =
#
#$%
.Playershaveincentivetoplaycooperateaslongas ≥
'()(*+,-../(%0+(
'()(*+,123456
holds.
Inrepeatedgamescoordinationfailurescanbeovercomethrough communicationandleadership.
Playerscanalsolearnfrompastgames,leadingthemtochooseactionclosertoequilibriumovertime.
One type of dynamic games with incomplete information are signalling games, in which private
informationcanbesignalled(misleadingornot)totheuninformedparty.Theinformedplayerhasan
incentive to communicate strategically and uninformed party takes this in account. In this game
strategiesareasimportasbeliefs,leadingtoaperfectBayesianequilibrium.Extrarequirements:
1. Whenaplayerisuncertainabouthistoricmoves,hemusthaveabeliefoverhistoricplay
2. Strategiesmustbesequentiallyrational,giventheirbeliefsatthatpointinthegame
3. BeliefsshouldbedeterminedbyBayes’rulesfromtheplayersequilibriumstrategies
Week1:Camerer(2003)–Behaviouralstudiesofstrategicthinkingingames
Gametheoryisamathematicallanguagefordescribingstrategicinteractions,inwhicheachplayer’s
choiceaffectsthepayoffofotherplayers.Theimpactofgametheoryinpsychologyhasbeenlimited
bythelackofcognitivemechanismsunderlyinggametheoreticpredictions.Behaviouralgametheory
isarecentapproachlinkinggametheorytocognitivesciencebeaddingcognitivedetailsaboutsocial
utilityfunctions,theoriesoflimitsoniteratedthinkingandstatisticaltheoriesofhowplayerslearnand
influenceothers.Newdirectionsincludetheeffectsofgamedescriptionsonchoice(framing),strategic
heuristicsandmentalrepresentation.Theseideaswillhelprootfametheorymoredeeplyincognitive
scienceandextendthescopeofbothenterprises.
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Week2:KingCasasetal(2005)–Trustintwopersoneconomicsexchange
Usingamultiroundversionofaneconomicexchange(trustgame),theauthorsreportthatreciprocity
expressed by one player, strongly predicts future trust expressed by their partner – a behavioural
findingmirroredbyneuralresponsesinthedorsalstriatum.Here,analyseswithinandbetweenbrains
revealed two signals – one encoded by response magnitude and the other by response timing.
Response magnitude correlated with the ‘intention to trust’ shifted its time of occurrence by 14
secondsasplayersreputationsdeveloped.Thistemporaltransferresemblesasimilarshiftofreward
predictionerrorscommontoreinforcementlearningmodels,butinthecontextofasocialexchange.
These data extend previous modelbased functional magnetic resonance imaging studies into the
socialdomainandbroadenourviewofthespectrumoffunctionsimplementedbythedorsalstriatum.
Week2:Sanfeyetal(2003)–Neuralbasisofdecisionmakingintheultimatumgame
Standardeconomicrationaleisthataproposeroffersthemarginalpriceorcontractpossibletothe
responder that he will accept. Evidence shows however, that offers are around 50% of the total
amountandthatrejectionoftenfollowsfromreactiontotheofferbeingperceivedasunfair.Sanfey
etalinvestigateneuralandbehaviouralreactionstofairoffers(50/50)ofunfairoffers(unequalsplit
inproposersadvantage).Participantsacceptedallfairoffers,butacceptanceratedropsthelessfair
theoffergets,tothepointthathumansrejectionrateissignificantlyhigherthanthatofacomputer.
MRIscansalsoshowbrainactivityinregionsassociatedwithnegativeemotionswhenunfairoffersare
made.
Week3:BertrandandSchoar(2003)–ManagingwithStyle
Howmuchdoindividualmanagersmatterforfirmbehaviourandeconomicperformance?Managers
areoftenperceivedashavingtheirownstyleswhenmakinginvestment,financing,andotherstrategic
decisions,therebyimprintingtheirpersonalmarksonthecompaniestheymanage.
We estimate the role of managers in a framework where we can control for observable and
unobservabledifferencesacrossfirms.
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We construct a managerfirm matched panel data set, where we can track individual top
managersacrossdifferentfirmsovertime.
Allowstoestimatehowmuchoftheunexplainedvariationinfirmpracticescanbeattributed
tomanagerfixedeffects,aftercontrollingforfirmFEandtimevaryingfirmcharacteristics.
OurresultsshowthatmanagerFEareempiricallyimportantdeterminantsofawiderangeofcorporate
variables.Theseresultsprovideevidencethattopexecutivesvaryconsiderablyintheirmanagement
stylesandtherebysuggestarathernovelapproachforcorporatefinanceresearch:
1. Weshowthatthedifferencesinmanagerialpracticesaresystematicallyrelatedtodifferences
inperformance.
2. Weshowthatmanagerswithhigherperformancefixedeffectsalsoreceivehighersalary,and
thatthesemanagersaremorelikelytobefoundinbettergovernedfirms.
3. We find that older generations of CEOs appear overall more conservative in their decision
making.
4. ManagerwhoholdanMBAdegreeappearoveralltofollowmoreaggressivestrategies.
Weaskhowmuchofthevarianceinaparticularcorporatepolicycanbeattributedtomanagerspecific
effects.
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Wearenothopingtoestimatethecausaleffectofmanagersonfirmpractices,insteadwewantto
assesswhetherthereisanyevidencethatfirmpoliciessystematicallychangewiththeidentityofthe
managerinthesefirms.
1. Results in Table 3+4 suggest that managerspecific effects matter both economically and
statisticallyforthepolicydecisionsoffirms:managerfixedeffectsincreasetheadj.R2ofthe
estimatedmodelssignificantly.
2. Thereareimportantdifferencesastowhichdecisionvariablesseemtobemostaffectedby
managerdecisions.
3. Holdsforbothfinancialpoliciesandorganisationalpolicyvariables(R&D,SG&A,advertising,
etc.).
4. PanelBfocusesonmeasuresofcorporateperformance,i.e.therateofreturnonassetsand
operatingcashflowasaratiooftotalassets(addressesconcernof“cookingthebooks”).
One might worry that the manager fixed effects identified above do not imply persistence of
managerialstyleacrossjobsandfirms.
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Consideramanagerwhohappenstobepartofafirmduringaperiodofintenseacquisition
activity;wemightestimateapositiveacquisitionfixedeffectforthatmanagereventhough
thateffectdoesnotpersistinhisfuturefirm.
Table5addressesthisissue.Weregressamanager’saverageresidualinhissecondfirmonhisaverage
residualinthefirstfirm.Wefindapositiveandsignificantrelationshipbetweenamanager’sresidual
inhislastjobandhisresidualinhisfirstjobforallpolicyvariables.
Forexample,atopmanagerassociatedwith1percentextraleverageinhisfirstjobisassociatedwith
about 0.5 percent extra leverage in his second. These results are consistent a persistence of the
managerfixedeffectsacrossfirms.
WewanttoarguethatthatthemanagerFEcapturetheactiveinfluenceofmanagersoncorporate
decisions.
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Amanagermay,becoincidence,beinvolvedinawaveofacquisitionsinherorhispriorfirm,
andmaybewronglyperceivedasanacquisitionstylebyotherboards.Ifthisleadstothehiring
ofthatmanagerbyafirmthatwouldhavegoneonanexternalexpansionphaseevenwithout
themanager,wemightestimateapositiveacquisitionfixedeffectforthatmanager.
Toinvestigatethisalternativeinterpretation,weanalysetheprecisetimingoftheobservedchanges
incorporatepolicies.

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Onemightexpectthatsomeofthechangesinpoliciesprecedethearrivalofthenewmanager.
On the other hand, if managers do play the active role in shaping corporate policies, the
changesinpolicywillonlyhappenafterthemanagerishired.
We,therefore,assumethateachmanagerinourdatasetjoinshissecondfirmthreeyearspriortothe
actualturnoverdateandleavesthatfirmatthetimeoftheactualturnoverdate.

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Wefindthatestimatedcoefficientsintheseplaceboregressionsareeconomicallyverysmall
(closetozero).
Theseresultsconfirmthatthebulkofthechangesincorporatepolicyhappenoncethenew
managerhasjoinedthefirm,andnotpriortohisarrival.
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Wewanttogoastepfurtherandinvestigatewhetherthereareoverarchingpatternsinmanagerial
decisionmaking.Weanalysethecorrelationstructurebetweenthemanagerspecificfixedeffects.

Managers seem to differ in their approach toward external versus internal growth: strong
negativecorrelationbetweencapitalexpendituresandacquisitions.
Anotherestimationsuggestthatbettergovernedfirmsselectmanagerswithperformanceenhancing
styles.
We see that managers with higher returns on asset fixed effects receive higher residual total
compensationaswellashighersalarycompensation.
Furthermore,CEOswithanMBAappeartobemoreaggressive,choosingtoengageinahigherlevelof
capitalexpenditures,holdmoredebt,andpaylessdividends.
CEOsfromoldergenerationsappeartobelessaggressiveonaverage.
Week3:RotembergandSaloner(2000)–Visionaries,ManagersandStrategicDirection
Incentives for profitable innovation can be enhanced by employing a ‘visionary’ CEO with a vision
biasedtowardscertainprojects.CEOvisionchangestheprojectsthatgetimplementedandthusaffects
theincentivesofemployeeswhoareonlyrewardedforinnovativeideaswhentheyarerealised.Profits
maybeenhancedfurtherbylettingobjectivemanagersdecidewhichprojectstoinvestigate,although
theirdecisionscandifferfromthefirmsstrategysetoutbythebiasedCEO.
AbiasedCEOinfluencesthedirectionofthefirm,wherethemiddlemanagercanstillhaveimpacton
thestrategicdirectionthroughallocationofresources.Theauthorsseetheroleofstrategytoimprove
the firms set of innovative projects. Employees whose plans fit the strategy are motivatedto take
innovativeactions.CEObehaviourcanbemodelledwhenheisconsistentlybiasedtocertainprojects.
Thebasichierarchalmodel:seniormanagement(CEO),middlemanagerandemployee.TheCEO:
 Decideswhichprojectsthefirmimplements
 Hasavisionontheindustryandmightbeoverconfidentabouttheavailableinformation
 Hasabiasedvisioncanbedifferentfromshareholder’sunbiasedviews(baselineviews)
Themiddlemanagerisresponsibleforallocationresourcesandauthorizingemployeesinnovation
Employeesgenerateinnovationsbyexertingeffortandreceiveincentivepayforsuccessfulinnovations
Thebasicmodeldetails:
 Firmcanengageintwolinesofbusinessi{a,b}inwhichemployeecanundertakeinnovation
 Innovationcomesateffortcosts4 andrequiresexpendituresoffirmsresources4 
 Withprobability4 theinnovationissuccessful,generatingbenefits4 
 Atmostoneinnovationcanbeimplementedforwhichtheemployeereceivesincentivepay4 
Thebasicmodeltiming:
Period0Firmdecidestoinvestinbothaandborjustone.Alsothe(biased)CEOishired.
Period1Firmoffersincentivecontracttoemployeesinwhichtheyreceivepayforimplementation.
Period2Employeesdecidewhetherornottoexerteffort.
Period3CEOobservesemployees’innovationsanddecidesonimplementation(onlyonepossible).
Thebasicmodelnarrowstrategy(firstbest):
Jointsurplusforinnovationofoneactivityi4 = 4 4 − 4 where4 = 4 + 4 and = , 
Canfirmachievefirstbest?Solvewithbackwardinduction:
 Period3Firmimplementsinnovationiif4 − 4 ≥ 0
lOMoARcPSD|835417
(
 Period2Employeeexertseffortif4 4 − 4 ≥ 0so4 ≥ 1E 
E
(
 Period1Firmiswillingtopay4 = 1E if4 = 4 4 − 4 ≥ 0
E
(
Iffirmfreelychooses4 ithasnoincentiveproblemsandanincentivepayof4 = 1E yieldsfirstbest.
E
Firstbest:outcomethefirmcouldattainifitpaysemployeesdirectlyfortheireffort.Expectedprofit
fromhavingonlytheemployeeinactivityiattempttoinnovate:4 = 4 4 − 4 (4 = 4 + 4 ,  = , )
Thebasicmodelfirstbestbroadstrategy:
Jointsurplusforinnovationinbothactivities) = 0 0 + I (1 − 0 )I − 0 − I 
Canbewrittenas) = 0 + I − 0 I I whereAischosenwithtwosuccesses(0 > I )
If) > 0, ) > 0 ) > I sohiringabiasedCEOcanhelpthefirmgetclosertofirstbest.
CEObias:heseesvaluesofinnovationsdifferentfromtheirtruevalues
 CEOseesvalueofinnovationbas0 + 0 andofaasI + I where4 isthebias
 4 canbepositiveornegativeand0 = I = 0referstoanunbiasedCEO
ExogenousIncentivePayments
 IncentivepaykisexogenouslyfixedatN andreflectstheworthoftheincentivetoemployee
 IncentivepaypaidbyfirmisO ) anddifferencewithN ispotentialnonpecuniarycompensation
QR
QS
 WithrelativesmallO ) firmalwaysspends4 O ) < 0 −
andO ) < I −

1R (#,1S )
1S (#,1R )
Whichcontractsareprofitable?Usebackwardinduction(unbiased)
Period3CEOimplementsAif0 − O ) > I − O ) > 0
(
Period 2  A exerts effort if 0 O − 0 ≥ 0 can be written as O ≥ R   and B exerts effort if

(
S
I (1 − 0 )O − I ≥ 0canbewrittenasO ≥ 1 (#,1

)
S
1R
R
(
(
S
  so
Period 1  Unbiased CEO incentivizes only A when both successful since 1R ≤ O < 1 (#,1
)
recoursesareonlyspendonAwithoptimalcontract0 X0 − O ) Y − 0 ≥ 0
R
S
R
CanafirmdobetterwithabiasedCEO?
 WhenbothactivitiesaresuccessfulCEOwillimplementAif0 − O ) + 0 ≥ I − O ) + I 
 IfI − 0 > 0 − I > 0theCEOwillimplementBbecause0 − O ) + 0 < I − O ) + I 
 AisonlyimplementedifinnovationBhasfailed,soAonlyexertseffortif0 (1 − I )O  > 0 
Situation1:0 O  > 0 , I O  > I , I (1 − 0 )O  < I and0 (1 − I )O  < 0
Neitheremployeeexertseffortifhisinnovationisonlyimplementeduponfailureoftheothers,sothe
biasoftheCEOdetermineswhoexertseffort.Firmprofitswillbe0 (0 − O ) ) − 0 (narrowstrategy).
AbiasedCEOtowardsBwillbeprofitableifI XI − O ) Y − I > 0 X0 − O ) Y − 0 
Situation2:0 O  > 0 , I O  > I , I (1 − 0 )O  < I and0 (1 − I )O  > 0 
NowemployeeAexertseffortevenifhisinnovationisonlyimplementeduponfailureofB,whoexerts
effortifhisinnovationisalwaysimplementedwhensuccessful.UnbiasedchoosesAsoonlyAexerts
effort.BiasedCEOtowardsBwillimplementB,orAwhenBfails.Nowbothemployeesexerteffort.
UnbiasedCEOprofit) = 0 =  0 (1 − I )O ) − 0 isthenarrowstrategyprofitwhenfocussingonA
BiasedCEOtowardsBprofit) = I XI − O ) Y − I + 0 (1 − I )(0 − O ) ) − 0 
Q
HiringCEOwithbiasBprofitableif) > 0 I − S >  0 0 + (1 − I )O ) (bias>broadstrategy).
1S
Lemma:If4 O  > 4 I (1 − 0 )O  < I , I − 0 > 0 − I > 0
 0 (1 − I )O  < 0 I XI − O ) Y − I > 0 X0 − O ) Y − 0 
Q
 0 (1 − I )O  > 0 I − S >  0 0 + (1 − I )O ) 
1S
lOMoARcPSD|835417
EqualIncentivePaymentAcrossActivities
 Incentivepayisoptimallychosenbythefirmandthesameinbothactivities0 = I = O 
 InthisanalysisO = O ) canbeassumed
(
(S
(
(S
firstbestwithbothexertingeffortwhenfirmssetO = 1R = 1 (#,1

Case1:1R = 1 (#,1
)
)
R
S
(R
(S
R
R
S
R
Case2:1 > 1 (#,1 )firstbestcannotbeachieved
R
S
R
(S
 WhenfirmsetsO = 1 (#,1
thenAhasnoincentivesinceisdoesn’tcovereffortcosts
)
S
R
(
 WhenfirmsetsO = 1R thenbothexerteffortandBearnsarentbutbiaswon’treducerent
R
 HiringabiasedCEOtoawouldgivethesameexpectedpayoff
 HiringabiasedCEOtobonlyBexertseffortsonofirstbest
(
(S
firstbestcannotbeachieved
Case3:1R < 1 (#,1
)
R
S
R
(
 CEObiashaspositiverole,unbiasedCEOsetsO = 1R (onlyAexertseffort)
R
(S
(S
(
inwhichAwillearnrentsandexpectedprofitsare) − 0 b (#,1
− R c
 OrO = 1 (#,1
)
)
1
1
S
(R
(S
R
S
(S
(
Case3a:1 < 1 (#,1 )and0 < ) − 0 b1 (#,1
− 1R c
R
S
R
S
R)
R
R
R
(
(
R
 FirmscanbenefitfromhiringCEOwithI − 0 > 0 − I (biasB)andsuppose1S < 1 (#,1

)
S
(
 BiasedCEOsetsO = 1S andonlyBwillexerteffortgeneratingI 
S
(
R
S
(
S
 BiasisbeneficialifI > ) − 0 b1(#,1
− 1R c
)
R
R
(R
andbothAandBexerteffort
 BiasedCEOsetsO = 1 (#,1
)
R
S
R
S
(S[e Xfge Yhe
( [1S (#,1R )$1R ]
− (0 − I ) > 0
1S 1Ri(#,1R )
(
(S
(S
(
Case3b:1R < 1 (#,1
and0 < ) − 0 b1 (#,1
− 1R c
)
)
R
S
R
S
R
R
 Biasisbeneficialif
1R 1Si (#,1S )
S
− R
(
(
R
 FirmscanbenefitfromhiringCEOwithI − 0 > 0 − I (biasB)andsuppose1S > 1 (#,1

)
(
 BiasedCEOsetsO = 1S andbothAandBexerteffortwhereAreceivesarent
S
S
R
S
1 $1 ,1 1 
S
R S
I − (0 − I ) > 0
 HiringabiasedCEOisbeneficialif R1i (#,1
)
R
S
ActivitySpecificIncentivePayment
 Incentivepayisoptimallychosenbythefirmandcanbedifferentforbothactivities
(
(
Case1:0 − 1R ≥ I − 1S firstbestcanbeachieved
R
(
S
 Firmsets0 = 1R andI = 1
R
(S
S(fgeR)

(
(
(S
1R
1S
1S(fgeR)
 FirmpreferstoimplementAoverB:0 − R ≥ I − S >
 UnbiasedCEOimplementsBifI ≥ 1
(
(S
S(fgeR)
(


Case2:0 − 1R < I − 1S firstbestcannotbeachieved
R
(R $QR
S
(
(
R
 If0 ≥ 1 (#,1 )holds,firmsets0 = 1 (#,1
andI = 1S wherebothexerteffort
)
R
S
(
R
S
S
 Ifitdoesn’thold,firmsetsI = S andlevel0 isnotrelevantsoBexertsandAdoesn’texert
1S



lOMoARcPSD|835417
Week4:GoldfarbandXiao(2011)–ManagerialAbilityandStrategicEntryinUSTelecomMarkets
Empiricalmodelshavegenerallyfailedtorecognisevarianceinmanagers’abilitiestounderstandrival
firms’ strategic behaviour. Telecommunications Act of 1996 opened the competitive local
telecommunications industry in the US. The Act led to substantial entry; the entrants varied
significantlyinsize,management,andtelecommunicationsexperience.
Earlyyearsofthisindustryprovideanidealsettingforexploringheterogeneityinthestrategicability
ofmanagers.Datasuggestsastrongcorrelationbetweenmanagercharacteristicsandcompetitive
considerations.
Modeldrawsonlaboratoryevidenceofiterateddecisionmakinginsimultaneousgames.Cognitive
Hierarchy(CH)modelstheheterogeneityofplayersinsuchawaythatitincludesaparameterthat
identifiesplayersasbeingbetteratplayingthegame.
Highertypesarebetterabletopredictcompetitorbehaviourandconsequentlyarelesslikelytoregret
theirdecisionsoncealldecisionsareobserved.Weinterpretthehierarchyasameasureofstrategic
ability.ThisinterpretationallowsustoexaminewhichCEOcharacteristicsaredeterminantsofstrategic
ability.
1. Experienced,bettereducatedmanagerstendtoentermarketswithfewercompetitors.
2. Measure of strategic ability predicts outcomes outside our estimation window: firms with
managersofhigherestimatedabilityaremorelikelytostayinbusinessand,conditionalon
survival,havehigherrevenues.
3. Comparing results across years, we find that the measured level of ability is substantially
higherin2002thanin1998.
Intheregressionweusetoestimatetheprobabilityofentry,ofinterestarethesignsoftheinteractions
termsbetweenthenumberofcompetitorsandmanagercharacteristics.
Table2Bincludesinteractiontermsbetweenmanagercharacteristicsandthedemographiccontrols
relatedtodemandpotential.Weobservethatmoreexperienced,bettereducatedmanagerschoose
toentermarketswithlowerpopulations;suggestingthattheysomehowentermarketsthatothers
choosenottoenter.
Table3:resultsareconsistentwithouridentifyingassumptionsthatmanagercharacteristicsrelateto
profitsprimarilythroughentry.
Whatdrivesstrategicability(strategicabilityparameter,logτ):experience,toplevelundergraduate
institute,degreeinbusinessoreconomics.Theresultssuggestthathavingadegreeineconomicsor
businessisastrongsubstituteforindustryexperience,i.e.aneconomics/businessdegreecanpartially
substituteforexperience.
Wefindthatthepredictedτispositivelycorrelatedwithfourdifferentdefinitionsofsuccess.
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Week6:Arcidiaconoetal(2016)–Competitiveeffectsofentry
Thepaperlooksatthesupermarketindustryandcouplesweeklygrocerytransactionswiththeexact
locationandopeningdatesofWalmartsenteringthemarketoveranelevenyearperiod.They
examinehow their entry affects process and revenues at incumbent supermarkets and find that
WalmartSupercenter entry within one mile of an incumbent causes a 16% drop in revenue, an
effect thatdecreases quickly with distance. Despite large cross store differences in prices of
supermarketsexposed,thefindingsindicatethatSupercenterhasnocausaleffectonincumbent
prices.
TheauthorsinvestigatetheimpactofWalmartSupercenterentryonpricesandrevenuesof
incumbentsupermarkets.Walmarthas15%25%lowerpricesgivingacompetitiveadvantage.One
shouldexpectthatthisstartsasizablereactioninpricesofincumbentsupermarkets.Empirical
studiesfoundlargecompetitivepriceeffects,butaftercontrollingforfixedstoreeffect,nocausal
impactonincumbentsupermarketpriceshasbeenfound.
The sources of data are opening date and address of every Walmart and IRI marketing dataset
containingweeklysalesdataforarepresentativesampleofsupermarketsbetween2001and2011.
Focusison15foodproductcategories.Thedependentvariablesareweeklyrevenuesandpriceseries
byproduct category.Thedatashows considerablevariationinrevenue andprices.Thedescriptive
findingsshowsupermarketsnearWalmartSupercenterarelowerpriced.Second,withinstore
prepostdifferencesinpricesarenotsignificantlydifferent(onlyiflocated<1mile).
Empiricalmodel1:5+ = ∑X5tYt+ + 5+ (locationisnotrandommitigateendogeneity!)




5+ isthedependentvariable:loggedrevenueorloggedprices
X5t Yisthefunctiondrivingdistance
t+ istheindicatorvariablepresencejthSupercentertimet
Locationisnotrandomsomitigateendogeneity5+ = 5 + + + ó(5) () + 5+ 
I
t+ + 5 + + + ó(5) () + 5+ 
Empiricalmodel2:5+ = ∑()∑5t
 Generalizationdiffindiffapproach
 TreatedfirmsaresupermarketsexposedtoSupercenter
 Controlfirmsarefirmsthatarenotexposedorexposedatadifferentperiod
Resultsonrevenue:Inthecrosssectionaleffectsonthemarketsarenotclear,onlysomesignificant.
Includingfixedchaineffectswithinchainwithinmarketshownegativeeffectonrevenuesthecloser
to the Supermarket. Within store effect shows an even stronger negative relation of revenues on
Walmartentry.Graphshowsstablerevenuetrendbeforeentryandasteepdropatmomentof
entry.
Resultsonprices:Within1mileexposureofWalmartentryhasasmallsignificanteffectonprices,
diminishingforfurtherlocations.Includingmarketandchainfixedeffectsstrengthen thisnegative
relationonprices.ThisshowsWalmartlocatesclosetolowpricecompetitors.Exposuredoesn’thave
effectonprices.
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Noevidencefoundforthenullhypothesisthatpriceeffectcouldresultfromdifferentpricereactions
acrossproducts.Alsopricesmightbenotunderdirectcontrolbecausemanufacturersofprivatelabels.
Chainsupermarketsmighthavedifficultyadjustingprices(rigidprices).
AuthorsinvestigatetheimpactofWalmartSupercenterentryonpricesandrevenuesofincumbent
supermarkets.Impactonrevenuesarelarge(16%declinewithin1mile)butnoimpactonprices.Also
itisfoundthatWalmartlocatesnearlowpricehighrevenuestores.Firmsshowtobelessresponsive
todemandshocksthanassumedbytheoreticalmodels.