Measuring Deterrence Motives in Dynamic Oligopoly Games
Management Science, forthcoming
78 Pages Posted: 29 Mar 2022 Last revised: 27 Dec 2022
Date Written: December 24, 2022
Abstract
This paper presents a novel decomposition approach for measuring deterrence motives in dynamic oligopoly games. Our approach yields a formalized, scale-free and interpretable measure of deterrence motives that informs researchers about the proportion for which deterrence motives account of all entry motives. In addition, the decomposition leads to a set of conditions for counterfactual analysis where hypothetical scenarios with deterrence motives eliminated can be explored. We later illustrate the use of our measure and counterfactual by conducting an empirical case study about the dynamics of coffee chain stores in Toronto, Canada. The inferred deterrence motives suggest that a noticeable proportion of entry motives can be attributed to deterrence; it can be as high as 43% for the increasingly dominant coffee chain, Starbucks, in certain types of markets. Finally, counterfactual analysis confirms that deterrence motives are indeed associated with Starbucks' aggressive presence as the number of its outlets and its market share are markedly lower once these motives are eliminated.
Keywords: Chain Stores; Dynamic Oligopoly Games; Entry and Exit; Dynamic Discrete Choice; Industry Dynamics; Market Power; Preemption; Retail Landscape and Strategy
JEL Classification: L1; L2; L4; M3
Suggested Citation: Suggested Citation