Entry and Competition in Differentiated Products Markets
AbstractWe propose a methodology for estimating the competition effects from entry when firms sell differentiated products. We first derive precise conditions under which Bresnahan and Reiss' entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition effects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition effects from entry. We apply our approach to seven different local service sectors. We find that entry typically leads to significant market expansion, implying that traditional ETRs may substantially underestimate the competition effects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insignificant effects. In one sector, we find that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8353.
Date of creation: Apr 2011
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Other versions of this item:
- Schaumans, C.B.C. & Verboven, F.L., 2011. "Entry and Competition in Differentiated Products Markets," Discussion Paper 2011-025, Tilburg University, Tilburg Law and Economic Center.
- Schaumans, C.B.C. & Verboven, F.L., 2011. "Entry and Competition in Differentiated Products Markets," Discussion Paper 2011-049, Tilburg University, Center for Economic Research.
- Catherine SCHAUMANS & Frank VERBOVEN, 2011. "Entry and competition in differentiated products markets," Center for Economic Studies - Discussion papers ces11.23, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
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