Weighted probabilities in tacit coordination under uncertainty : theory and evidence from market entry games

Tacit coordination in large groups is studied theoretically and experimentally in a class of noncooperative n-person games in which each of n symmetric players is required to choose simultaneously between two actions: "staying out" and receiving a fixed payoff or "entering the market" and participating in a binary lottery whose expected value is not fixed but, rather, is known to decrease linearly in the number of entrants. After subjecting the equilibrium probability of entry to a nonlinear transformation of the probability scale, which was originally proposed by prospect theory for individual decision under risk, the mixed-strategy equilibrium solution accounts for the tacit coordination on the aggregate level remarkably well. It also accounts equally well for the tacit coordination in several previous and quite different market entry games with fixed market capacity, symmetric players, and no uncertainty about the outcome associated with entry. However, our results reject the mixed-strategy equilibrium solution as a descriptive model of individual behavior, and suggest that tacit coordination is achieved through some sort of adaptive learning