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Entry and Competition in Differentiated Products Markets

TILEC Discussion Paper No. 2011-025

CentER Discussion Paper No. 2011-049

34 Pages Posted: 22 Apr 2011  

Catherine Schaumans

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

Frank Verboven

Catholic University of Leuven (KUL) - Department of Applied Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: April 15, 2011

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.

Keywords: competition, entry, local services sectors, entry threshold ratios

JEL Classification: K21, L13, L41

Suggested Citation

Schaumans, Catherine and Verboven, Frank, Entry and Competition in Differentiated Products Markets (April 15, 2011). TILEC Discussion Paper No. 2011-025. Available at SSRN: https://ssrn.com/abstract=1810485 or http://dx.doi.org/10.2139/ssrn.1810485

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

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
Belgium
+32 1 632 6944 (Phone)
+32 1 632 6732 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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