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Entry and Competition in Differentiated Products Markets

Author

Listed:
  • 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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    Keywords

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    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 - Political Economy and Comparative Economic Systems - - General - - - General
    • O00 - Economic Development, Innovation, Technological Change, and Growth - - General - - - General

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