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Entry, exit and the determinants of market structure

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  • Timothy Dunne
  • Shawn D. Klimek
  • Mark J. Roberts
  • Daniel Yi Xu

Abstract

Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist's long-run profits by the same amount as if the firm operated in a duopoly.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0907.

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Date of creation: 2009
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Handle: RePEc:fip:fedcwp:0907

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Keywords: Markets ; Competition ; Service industries;

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References

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Citations

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Cited by:
  1. Martin Gaynor & Robert J. Town, 2011. "Competition in Health Care Markets," NBER Working Papers 17208, National Bureau of Economic Research, Inc.
  2. Victor Aguirregabiria & Victor Aguirregabiria & Aviv Nevo & Aviv Nevo, 2010. "Recent Developments in Empirical IO: Dynamic Demand and Dynamic Games," Working Papers tecipa-419, University of Toronto, Department of Economics.
  3. Aguirregabiria, Victor, 2012. "A method for implementing counterfactual experiments in models with multiple equilibria," Economics Letters, Elsevier, vol. 114(2), pages 190-194.
  4. Panle Jia Barwick & Parag A. Pathak, 2011. "The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston," NBER Working Papers 17227, National Bureau of Economic Research, Inc.
  5. Xiao, Mo & Orazem, Peter F., 2011. "Does the fourth entrant make any difference?: Entry and competition in the early U.S. broadband market," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 547-561, September.
  6. Maican, Florin & Orth, Matilda, 2008. "Productivity Dynamics and the Role of “Big-Box” Entrants in Retailing," Working Papers in Economics 328, University of Gothenburg, Department of Economics.
  7. Mo Xiao & Ying Fan, 2012. "Entry under Subsidy: the Competitive U.S. Local Telephone Industry," 2012 Meeting Papers 374, Society for Economic Dynamics.
  8. Maican, Florin G., 2012. "From Boom to Bust and Back Again: A dynamic analysis of IT services," Working Papers in Economics 543, University of Gothenburg, Department of Economics.
  9. Amir, Rabah & Halmenschlager, Christine & Jin, Jim, 2011. "R&D-induced industry polarization and shake-outs," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 386-398, July.
  10. Victor Aguirregabiria & Junichi Suzuki, 2013. "Identification and Counterfactuals in Dynamic Models of Market Entry and Exit," Working Papers tecipa-475, University of Toronto, Department of Economics.
  11. Maican, Florin & Orth, ´Matilda, 2013. "Entry Regulations, Product Differentiation and Determinants of Market Structure," Working Paper Series 984, Research Institute of Industrial Economics.
  12. Nathan Yang, 2011. "An Empirical Model of Industry Dynamics with Common Uncertainty and Learning from the Actions of Competitors," Working Papers 11-16, NET Institute.
  13. Otsu, Taisuke & Pesendorfer, Martin & Takahashi, Yuya, 2013. "Testing for Equilibrium Multiplicity in Dynamic Markov Games," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 423, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  14. Ying Fan & Xiao Mo, 2010. "Estimating the Option Value of Waiting: A Dynamic Entry Game of the U.S. Local Telephone Competition," Working Papers 10-14, NET Institute.
  15. Naoaki Minamihashi, 2011. "Prevention of Competition by Competition Law: Evidence from Unbundling Regulation on Fiber-Optic Networks in Japan," ISER Discussion Paper 0804, Institute of Social and Economic Research, Osaka University.

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