Entry, Exit, and the Determinants of Market Structure
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)
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
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
Date posted: September 20, 2009
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