THE BIRTH OF A NEW MARKET

We consider a sequential decision model in which entrepreneurs decide on whether to enter a potential new market. Individual entrepreneurs have private expectations about the new market's viability. Over time, they learn about its viability from their own experience as well as that of earlier entrepreneurs. The distribution of the private expectations is said to be heterogeneous if external prior beliefs about the market's viability exist. We show that heterogeneity of expectations cuts both ways: while it facilitates the birth of viable markets, it also generates, via the existence of extremal beliefs, 'excessive' entry in non-viable markets.