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Entry and Competition in Differentiated Products Markets

35 Pages Posted: 22 Nov 2011  

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 (FEB)

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Date Written: September 1, 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.

Suggested Citation

Schaumans, Catherine and Verboven, Frank, Entry and Competition in Differentiated Products Markets (September 1, 2011). Available at SSRN: https://ssrn.com/abstract=1963113 or http://dx.doi.org/10.2139/ssrn.1963113

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 (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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