Burger King & McDonald's: Where's the Spillover?

Abstract

This paper studies how spillover effects from competitors' choices affect a firm's decision to open a store. Using panel data from the United Kingdom's fast food industry, I propose and estimate a game of entry under incomplete information that incorporates spillover effects between firms' entry decisions. A positive spillover is identified for Burger King - increasing the stock of existing McDonald's by 1 outlet increases Burger King's estimated equilibrium probability of opening a new store by approximately 18 percentage points. Furthermore, the estimated model suggests that this spillover affects Burger King's variable profit, as opposed to its fixed cost of entry. It is less clear whether this externality matters for McDonald's.

Keywords: Complementarity, fast food industry, nested pseudo likelihood, static entry game

JEL Classification: L13, L21, L80