Market Expansion and Business Stealing With Differentiated Products Using a Nested Logit

Christophe Bellego and Andreea Enache

No 19021, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper, we use the widely adopted nested logit model to examine how introducing a new product into a market of highly substitutable, differentiated goods affects both market expansion and business stealing. Central to our analysis is the nesting parameter $\sigma$, which captures the correlation in consumers' unobserved utilities among products in the same nest. We derive explicit conditions under which an entrant spurs market expansion and/or business stealing, depending on $\sigma$ and product characteristics. Notably, we show that market expansion can arise even as $\sigma$ approaches 1, and that shifts in market shares can be substantial. We illustrate these findings through simulations and an empirical application in the French movie industry, and discuss broader implications for empirical work.

Keywords: Entry (search for similar items in EconPapers)
JEL-codes: C54 (search for similar items in EconPapers)
Date: 2024-04
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