Preemptive Entry and Technology Diffusion: The Market for Drive-In Theaters

41 Pages Posted: 25 Oct 2021 Last revised: 9 May 2022

See all articles by Ricard Gil

Ricard Gil

Queen's University (Canada) - Smith School of Business

Jean-Francois Houde

University of Wisconsin - Madison - Department of Economics

Shilong Sun

University of Wisconsin-Madison

Yuya Takahashi

University of Washington

Date Written: October 2021

Abstract

This paper studies the role and incidence of entry preemption strategic motives on the dynamics of new industries, while providing an empirical test for entry preemption, and quantifying its impact on market structure. The empirical context is the evolution of the U.S. drive-in theater market between 1945 and 1957. We exploit a robust prediction of dynamic entry games to test for preemption incentives: the deterrence effect of entering early is only relevant for firms in markets of intermediate size. Potential entrants in small and large markets face little uncertainty about the actual number of firms that will eventually enter. This leads to a non-monotonic relationship between market size and the probability of observing an early entrant. We find robust empirical support for this prediction using a large cross-section of markets. We then estimate the parameters of a dynamic entry game that matches the reduced-form prediction and quantify the strength of the preemption incentive. Our counterfactual analysis shows that strategic motives can increase the number of early entrants by as much as 50 percent in mid-size markets without affecting the number of firms in the long run. By causing firms to enter the market too early, we show that strategic entry preemption leads on average to a 5% increase in entry costs and a 1% decrease in firms' expected value (relative to an environment without strategic investments).

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Suggested Citation

Gil, Ricard and Houde, Jean-Francois and Sun, Shilong and Takahashi, Yuya, Preemptive Entry and Technology Diffusion: The Market for Drive-In Theaters (October 2021). NBER Working Paper No. w29408, Available at SSRN: https://ssrn.com/abstract=3949219

Ricard Gil (Contact Author)

Queen's University (Canada) - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Jean-Francois Houde

University of Wisconsin - Madison - Department of Economics ( email )

William H. Sewell Social Science Building
1180 Observatory Drive
Madison, WI 53706-1393
United States

Shilong Sun

University of Wisconsin-Madison ( email )

Yuya Takahashi

University of Washington ( email )

Seattle, WA 98195
United States

HOME PAGE: http://https://econ.washington.edu/people/yuya-takahashi

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