Who thinks about the competition? Managerial ability and strategicentryin US local telephone markets

This paper examines how manager and firm characteristics relate to entrydecisions in US local telephone markets. To do so, it develops astructural econometric model that allows managers to be heterogeneous intheir ability to correctly conjecture competitor behavior. The modeladapts Camerer, Ho, and Chong's (2004) Cognitive Hierarchy model to areal-world setting. We observe the industry in 1998, shortly after theTelecommunications Act of 1996 opened up the market. We find that olderfirms with older, more experienced managers have higher estimated levelsof strategic ability. Managers with degrees in economics or business,and managers with graduate degrees, also have higher estimated levels ofstrategic ability. We find no evidence that university quality isrelated to ability. We repeat this exercise using data from 2000, 2002,and 2004. While the core results do not change, the overall level ofmeasured strategic ability increases substantially by 2004. Theestimates of strategic ability are also correlated with survival: thosefirms with lower estimated levels of ability are more likely to exit theindustry early.