Abstract

http://ssrn.com/abstract=1815848
 
 

Citations (2)



 


 



Entry and Competition in Differentiated Products Markets


Catherine Schaumans


Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg Law and Economics Center (TILEC)

Frank Verboven


KU Leuven - Faculty of Business and Economics (FBE)

April 2011

CEPR Discussion Paper No. DP8353

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.

Number of Pages in PDF File: 37

Keywords: competition, entry, local service sectors

JEL Classification: L13, L41

working papers series





Date posted: April 20, 2011  

Suggested Citation

Schaumans, Catherine and Verboven, Frank, Entry and Competition in Differentiated Products Markets (April 2011). CEPR Discussion Paper No. DP8353. Available at SSRN: http://ssrn.com/abstract=1815848

Contact Information

Catherine Schaumans (Contact Author)
Tilburg University - Center and Faculty of Economics and Business Administration ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Tilburg Law and Economics Center (TILEC) ( email )
Warandelaan 2
Tilburg, 5000 LE
Netherlands
Frank Verboven
KU Leuven - Faculty of Business and Economics (FBE) ( email )
Naamsestraat 69
Leuven, B-3000
Belgium
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