In discussing market entry decisions and the strategic interaction bet
ween an incumbent firm and an entrant, the focus in the literature has
been on the different asymmetries that exist between the two. In this
paper, we claim that great importance should also be given to the fac
t that the incumbent firm is in the industry while the entrant is outs
ide the industry. Therefore, even without any other asymmetries, we sh
ould expect different behavior from the two types of firms. Making use
of the existing literature on decision making under uncertainty, the
paper focuses on reference-dependent preferences and on loss aversion.
The paper demonstrates that the firms' reference points and loss aver
sion affect a firm's entry/exit decision, the self-selection of entran
ts, and the market structure that emerges.