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Do Entry Conditions Vary over Time? Entry and Competition in the Broadband Market: 1999-2003

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Author Info
Xiao, Mo
Orazem, Peter

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Abstract

We extend Bresnahan and Reiss’s (1991) model of local oligopoly to allow firm entry and exit over time. In our framework, entrants have to incur sunk costs in order to enter a market. After becoming incumbents, they disregard these entry costs in deciding whether to continue operating or to exit. We apply this framework to study market structure and competitive conduct in local markets for high-speed Internet service from 1999 to 2003. Replication of Bresnahan and Reiss’s framework generates unreasonable variation in firms’ competitive conduct over time. This variation disappears when entry costs are allowed. We find that once the market has one to three firms, the next entrant has little effect on competitive conduct. We also find that entry costs vary with the order of entry, especially for early entrants. Our findings highlight the importance of sunk costs in determining entry conditions and inferences about firm conduct.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12500.

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Length: 44 pages
Date of creation: 16 Feb 2006
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Handle: RePEc:isu:genres:12500

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Related research
Keywords: Broadband High-Speed Internet Entry Exit Competition Pricing oligopoly

Find related papers by JEL classification:
L8 - Industrial Organization - - Industry Studies: Services

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  1. Toivanen, O. & Waterson, M., 2001. "Market Structure and Entry: Where's the Beef?," The Warwick Economics Research Paper Series (TWERPS) 593, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  2. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 221-242, Summer.
  3. Angelique Augereau & Shane Greenstein & Marc Rysman, 2004. "Coordination vs. Differentiation in a Standards War: 56K Modems," NBER Working Papers 10334, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Reiss, Peter C, 1996. "Empirical Models of Discrete Strategic Choices," American Economic Review, American Economic Association, vol. 86(2), pages 421-26, May. [Downloadable!] (restricted)
  5. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 53-82, January. [Downloadable!] (restricted)
  6. Ariel Pakes & Michael Ostrovsky & Steve Berry, 2004. "Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Examples)," Harvard Institute of Economic Research Working Papers 2036, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  7. James E. Prieger, 2003. "The Supply Side of the Digital Divide: Is There Equal Availability in the Broadband Internet Access Market?," Economic Inquiry, Oxford University Press, vol. 41(2), pages 346-363, April. [Downloadable!] (restricted)
  8. David Dranove & Anne Gron & Michael J. Mazzeo, 2003. "Differentiation and Competition in HMO Markets," Journal of Industrial Economics, Blackwell Publishing, vol. 51(4), pages 433-454, December. [Downloadable!] (restricted)
  9. Wilson, Robert, 1992. "Strategic models of entry deterrence," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 10, pages 305-329 Elsevier. [Downloadable!] (restricted)
  10. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July. [Downloadable!] (restricted)
  11. Toivanen, Otto & Waterson, Michael, 2000. "Empirical research on discrete choice game theory models of entry: An illustration," European Economic Review, Elsevier, vol. 44(4-6), pages 985-992, May. [Downloadable!] (restricted)
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