Abstract

http://ssrn.com/abstract=1475709
 
 

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Entry, Exit, and the Determinants of Market Structure


Timothy Dunne


Federal Reserve Bank of Cleveland

Shawn D. Klimek


U.S. Census Bureau - Center for Economic Studies

Mark J. Roberts


Pennsylvania State University - College of the Liberal Arts - Department of Economics; National Bureau of Economic Research (NBER)

Daniel Xu


New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

September 1, 2009

US Census Bureau Center for Economic Studies Paper No. CES-WP 09-23

Abstract:     
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 firm’s long-run profits by the same amount as if the firm operated in a duopoly.

Number of Pages in PDF File: 55

Keywords: entry, exit, market structure, competition, service industry

JEL Classification: L11, L13, L84

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Date posted: September 20, 2009  

Suggested Citation

Dunne, Timothy and Klimek, Shawn D. and Roberts, Mark J. and Xu, Daniel, Entry, Exit, and the Determinants of Market Structure (September 1, 2009). US Census Bureau Center for Economic Studies Paper No. CES-WP 09-23. Available at SSRN: http://ssrn.com/abstract=1475709 or http://dx.doi.org/10.2139/ssrn.1475709

Contact Information

Timothy Dunne
Federal Reserve Bank of Cleveland ( email )
PO Box 6387
Cleveland, OH 44101-1387
United States
Shawn D. Klimek (Contact Author)
U.S. Census Bureau - Center for Economic Studies ( email )
4600 Silver Hill Road
Washington, DC 20233
United States
(301) 763-2861 (Phone)
(301 763-5935 (Fax)
HOME PAGE: http://www.ces.census.gov
Mark J. Roberts
Pennsylvania State University - College of the Liberal Arts - Department of Economics ( email )
513 Kern Graduate Building
University Park, PA 16802-3306
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Daniel Xu
New York University (NYU) - Department of Economics ( email )
269 Mercer Street, 7th Floor
New York, NY 10011
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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