Entry, Exit, and the Determinants of Market Structure
55 Pages Posted: 20 Sep 2009
There are 4 versions of this paper
Entry, Exit, and the Determinants of Market Structure
Entry, Exit, and the Determinants of Market Structure
Entry, Exit and the Determinants of Market Structure
Entry, Exit, and the Determinants of Market Structure
Date Written: September 1, 2009
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.
Keywords: entry, exit, market structure, competition, service industry
JEL Classification: L11, L13, L84
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Estimating Dynamic Models of Imperfect Competition
By Patrick Bajari, C. Lanier Benkard, ...
-
Estimating Dynamic Models of Imperfect Competition
By Patrick Bajari, C. Lanier Benkard, ...
-
Sequential Estimation of Dynamic Discrete Games
By Victor Aguirregabiria and Pedro Mira
-
By Ariel Pakes and Paul Mcguire
-
Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Examples)
By Ariel Pakes, Michael Ostrovsky, ...
-
Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Samples)
By Ariel Pakes, Michael Ostrovsky, ...
-
A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft
-
Multiple Equilibria and Deterrence in Airline Markets
By Federico Ciliberto and Zhou Zhang
-
Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity
-
Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity