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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
15313.
Length: Date of creation: Sep 2009 Date of revision: Handle: RePEc:nbr:nberwo:15313
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Jeffrey R. Campbell & Hugo A. Hopenhayn, 2002.
"Market Size Matters,"
NBER Working Papers
9113, National Bureau of Economic Research, Inc.
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