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Entry and Competition in Differentiated Products Markets

Author

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  • Schaumans, C.B.C.

    (Tilburg University, Center For Economic Research)

  • Verboven, F.L.

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' entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition effects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition effects from entry. We apply our approach to seven different 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. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insignificant effects. In one sector, we find that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.
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Suggested Citation

  • Schaumans, C.B.C. & Verboven, F.L., 2011. "Entry and Competition in Differentiated Products Markets," Discussion Paper 2011-049, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:22008ac6-8483-48ea-9206-e0cc51941534
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    7. Martin Lábaj & Peter Silanič & Christoph Weiss & Biliana Yontcheva, 2018. "Market structure and competition in the healthcare industry," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(8), pages 1087-1110, November.
    8. Pennerstorfer, Dieter & Yontcheva, Biliana, 2021. "Local market definition in competition analysis: An application to entry models," Economics Letters, Elsevier, vol. 198(C).
    9. Somohano-Rodríguez, Francisco M. & Madrid-Guijarro, Antonia, 2022. "Do industry 4.0 technologies improve Cantabrian manufacturing smes performance? The role played by industry competition," Technology in Society, Elsevier, vol. 70(C).
    10. Anwar Shah & Tehseen Ahmed Qureshi, 2022. "Regulatory Framework and Behavioural Issues in the Informal Khokhas’ Markets in Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(2), pages 153-168.
    11. Michael L. Polemis & Markos Tselekounis, 2021. "Threshold effects in the regulation-innovation nexus: evidence from the telecommunications industry," Journal of Regulatory Economics, Springer, vol. 60(1), pages 74-93, August.
    12. Dieter Pennerstorfer & Biliana Yontcheva, 2019. "How to Draw the Line: A Note on Local Market Definition," Economics working papers 2019-17, Department of Economics, Johannes Kepler University Linz, Austria.
    13. 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.
    14. Alessandro Bonanno & Francesco Bimbo & Elena Castellari & Paolo Sckokai, 2017. "Five-a-Day, Fruit and Vegetables Portions, and the Food Environment: The Italian Case," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 39(4), pages 682-709.
    15. Cleary, Rebecca & Bonanno, Alessandro & Chenarides, Lauren & Goetz, Stephan J., 2018. "Store profitability and public policies to improve food access in non-metro U.S. counties," Food Policy, Elsevier, vol. 75(C), pages 158-170.
    16. Kesternich, Iris & Schumacher, Heiner & Van Biesebroeck, Johannes & Grant, Iris, 2020. "Market size and competition: A “hump-shaped” result," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    17. 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 - Leibniz Centre for European Economic Research.
    18. Jan De Loecker & Johannes Van Biesebroeck, 2016. "Effect of International Competition on Firm Productivity and Market Power," NBER Working Papers 21994, National Bureau of Economic Research, Inc.
    19. 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.
    20. 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.
    21. 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.
    22. Capera Romero, Laura, 2020. "Essays on competition, regulation and innovation in the banking industry," Other publications TiSEM 5185bee5-c023-4219-90db-0, Tilburg University, School of Economics and Management.
    23. Avdiu, Besart, 2018. "Optimal capital and labor income taxation in small and developing countries," MPRA Paper 84884, University Library of Munich, Germany.
    24. Paolo Coccorese & Alfonso Pellecchia, 2022. "Deregulation, Entry, and Competition in Local Banking Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 61(2), pages 171-197, September.
    25. Rebecca Cleary & Lauren Chenarides, 2022. "Food retail profits, competition, and the Great Recession," Agribusiness, John Wiley & Sons, Ltd., vol. 38(3), pages 557-578, July.

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    More about this item

    Keywords

    competition; entry; local services sectors; entry threshold ratios;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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