Entry, Exit and the Determinants of Market Structure

56 Pages Posted: 24 Apr 2010

See all articles by Timothy Dunne

Timothy Dunne

Federal Reserve Bank of Cleveland

Shawn D. Klimek

U.S. Census Bureau - Center for Economic Studies

Mark J. Roberts

Pennsylvania State University; National Bureau of Economic Research (NBER)

Daniel Xu

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

Multiple version iconThere are 4 versions of this paper

Date Written: April 23, 2010

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 rms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist’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

Dunne, Timothy and Klimek, Shawn D. and Roberts, Mark J. and Xu, Daniel, Entry, Exit and the Determinants of Market Structure (April 23, 2010). FRB of Cleveland Policy Discussion Paper No. 09-07. Available at SSRN: https://ssrn.com/abstract=1595061 or http://dx.doi.org/10.2139/ssrn.1595061

Timothy Dunne (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

Shawn D. Klimek

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

University Park
State College, PA 16802
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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