Download this Paper Open PDF in Browser

Entry- and Sunk-Cost Spillovers from the Rival: Evidence from Entry and Expansion of KFC and Mcdonald's in Chinese Cities

58 Pages Posted: 19 Mar 2014  

Aamir Rafique Hashmi

University of Calgary - Department of Economics; University of Calgary

Ping Xiao

University of Technology Sydney (UTS) - Faculty of Business

Qiaowei Shen

University of Pennsylvania - Marketing Department

Date Written: March 18, 2014

Abstract

We model the entry and expansion of KFC and McDonald's in Chinese cities as a dynamic game. We assume that the observed entry and expansion decisions are equilibrium outcomes. This allows us to recover the structural parameters of the game without solving for equilibrium. We use the estimated model to study the entry- and sunk-cost spillovers from the rival. Our estimates suggest substantial spillovers to the cost of entering a new city. For example, if the rival is not present in the city in which the chain is entering and the distance from the nearest city where the rival is present decreases by 100 kilometers, the cost of entry into the city decreases by 1.22 standard deviations for KFC and 1.52 standard deviations for McDonald's. If the rival is already present in the city, a one-unit increase in the number of rival's outlets decreases the cost of entry by 0.59 standard deviations for McDonald's but increases it by 1.49 standard deviations for KFC. We also find that the spillovers to the sunk cost of opening a new outlet are much smaller. Hence the expansion within a city is not as much influenced by the presence of the rival as is the entry into a new city.

Keywords: Dynamic Games, Dynamic Entry, Spillovers, Fastfood Industry, China

JEL Classification: L13, L81, M31

Suggested Citation

Hashmi, Aamir Rafique and Xiao, Ping and Shen, Qiaowei, Entry- and Sunk-Cost Spillovers from the Rival: Evidence from Entry and Expansion of KFC and Mcdonald's in Chinese Cities (March 18, 2014). Available at SSRN: https://ssrn.com/abstract=2410700 or http://dx.doi.org/10.2139/ssrn.2410700

Aamir Hashmi (Contact Author)

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

University of Calgary ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada

HOME PAGE: http://aamirhashmi.com

Ping Xiao

University of Technology Sydney (UTS) - Faculty of Business ( email )

Australia

Qiaowei Shen

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

Paper statistics

Downloads
74
Rank
275,958
Abstract Views
417