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Entry and Competition in Differentiated Products Markets

Author

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  • Catherine Schaumans

    () (Tilburg University, TILEC, and CentER)

  • Frank Verboven

    () (University of Leuven and CEPR (London))

Abstract

We 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’s entry threshold ratios (ETRs) can be used to measure competition effects. We then augment the traditional entry model with a revenue equation. This serves to adjust the ETRs by the extent of market expansion from entry, giving unbiased estimates of the competition effects. We apply our approach to seven 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. © 2015 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Catherine Schaumans & Frank Verboven, 2015. "Entry and Competition in Differentiated Products Markets," The Review of Economics and Statistics, MIT Press, vol. 97(1), pages 195-209, March.
  • Handle: RePEc:tpr:restat:v:97:y:2015:i:1:p:195-209
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Martin Lábaj & Karol Morvay & Peter Silaniè & Christoph Weiss, 2014. "Market Structure in Transition: Entry and Competition in Slovakia," Department of Economic Policy Working Paper Series 005, Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava.
    2. Martin Lábaj & Karol Morvay & Peter Silanič & Christoph Weiss & Biliana Yontcheva, 2018. "Market structure and competition in transition: results from a spatial analysis," Applied Economics, Taylor & Francis Journals, vol. 50(15), pages 1694-1715, March.
    3. Cleary, Rebecca & Goetz, Stephan J. & Thilmany McFadden, Dawn D. & Ge, Houtian, 2017. "Location and Profit Drivers of Local Food Hubs," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258538, Agricultural and Applied Economics Association.
    4. Cerasi, Vittoria & Chizzolini, Barbara & Ivaldi, Marc, 2009. "The Impact of Mergers on the Degree of Competition in the Banking Industry," IDEI Working Papers 582, Institut d'Économie Industrielle (IDEI), Toulouse, revised 07 Jun 2012.
    5. Martin Lábaj & Alzbeta Siskovicova & Barbora Skalicanova & Peter Silanic & Christoph Weiss & Biliana Yontcheva, 2015. "Market Structure and Competition in the Health-care Industry: Results from a Transition Economy," Department of Economic Policy Working Paper Series 010, Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava.
    6. repec:oup:apecpp:v:39:y:2017:i:4:p:682-709. is not listed on IDEAS
    7. Martin Lábaj & Peter Silaniè & Christoph Weiss, 2013. "Entry and Competition in a Transition Economy: The Case of Slovakia," Department of Economic Policy Working Paper Series 003, Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava.
    8. repec:eee:jfpoli:v:75:y:2018:i:c:p:158-170 is not listed on IDEAS
    9. Avdiu, Besart, 2018. "Optimal capital and labor income taxation in small and developing countries," MPRA Paper 84884, University Library of Munich, Germany.
    10. Nikogosian, Vigen & Weigand, Jürgen, 2012. "Forward integration and market entry: Evidence from natural gas markets for household customers in Germany," ZEW Discussion Papers 12-062, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    11. De Loecker, Jan & Van Biesebroeck, Johannes, 2016. "The effect of international competition on firm productivity and market power," CEPR Discussion Papers 11114, C.E.P.R. Discussion Papers.
    12. Gayle, Philip G. & Harrison, Teresa D. & Thornton, Jeremy, 2017. "Entry, donor market size, and competitive conduct among nonprofit firms," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 294-318.

    More about this item

    Keywords

    competition effects; differentiated products; ETRs; traditional entry model; market expansion;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • G00 - Financial Economics - - General - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • P00 - Economic Systems - - General - - - General
    • O00 - Economic Development, Innovation, Technological Change, and Growth - - General - - - General

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