Entry, exit and the determinants of market structure

Timothy Dunne, Shawn Klimek (), Mark Roberts and Daniel Yi Xu

No 907, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist's long-run profits by the same amount as if the firm operated in a duopoly.

Keywords: Markets; Competition; Service industries (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ent, nep-ind and nep-tid
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Entry, exit, and the determinants of market structure (2013)
Working Paper: Entry, exit, and the determinants of market structure (2013)
Working Paper: Entry, Exit, and the Determinants of Market Structure (2009)
Working Paper: Entry, Exit, and the Determinants of Market Structure (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:0907

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DOI: 10.26509/frbc-wp-200907

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