In many settings where spatial preemption might be expected to produce tightly concentrated industry structures, firms share the market instead. Using a strategic investment model, I show that this can be rationalized by heterogeneous brand preferences, which cause new product introductions by incumbent firms to disproportionately cannibalize sales from existing affiliated products. I then present an empirical example using data on the branded segment of the lodging industry, which has many characteristics associated with spatial preemption, but is also characterized by strong brand-preferences. Consistent with the theoretical model, I find large within-firm revenue cannibalization effects from new hotel openings. These effects are attenuated -- but not removed -- by brand-proliferation strategies. Moreover, I find evidence that the industry practice of franchising through non-exclusive contracts softens inter-firm competition. Analyses of growing hotel markets support the conclusion that intra-firm cannibalization inhibits spatial preemption. Growth is far more likely to occur as a result of entry than expansion.
{"title":"Branding, Cannibalization, and Spatial Preemption: An Application to the Hotel Industry","authors":"N. Wilson","doi":"10.2139/ssrn.1959897","DOIUrl":"https://doi.org/10.2139/ssrn.1959897","url":null,"abstract":"In many settings where spatial preemption might be expected to produce tightly concentrated industry structures, firms share the market instead. Using a strategic investment model, I show that this can be rationalized by heterogeneous brand preferences, which cause new product introductions by incumbent firms to disproportionately cannibalize sales from existing affiliated products. I then present an empirical example using data on the branded segment of the lodging industry, which has many characteristics associated with spatial preemption, but is also characterized by strong brand-preferences. Consistent with the theoretical model, I find large within-firm revenue cannibalization effects from new hotel openings. These effects are attenuated -- but not removed -- by brand-proliferation strategies. Moreover, I find evidence that the industry practice of franchising through non-exclusive contracts softens inter-firm competition. Analyses of growing hotel markets support the conclusion that intra-firm cannibalization inhibits spatial preemption. Growth is far more likely to occur as a result of entry than expansion.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131132352","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Based on a structural model for initial firm size, survival and firm growth we estimate firm-specific transition probabilities between size classes of the firm size distribution. This allows an assessment of the impact of different (counterfactual) economic policy measures on intra-distribution dynamics of the firm size distribution. We find that policies increasing the life span of firms reduce the exit hazard of young firms, but also reduce the probability to be a Gazelle. An increase in the industry-wide entry rate increases the exit hazards of incumbent firms and has no strong impact on the likelihood of firms to become Gazelles. Increasing market growth, by contrast, decreases the exit hazards for incumbent firms and slightly increases the likelihood of firms to be Gazelles. Finally, an increase in the birth size of firms increases the probability of young firms to be Gazelles with strongest effects for the smallest firms.
{"title":"Job Creation and the Intra-Distribution Dynamics of the Firm Size Distribution","authors":"P. Huber, M. Pfaffermayr, H. Oberhofer","doi":"10.2139/ssrn.1876530","DOIUrl":"https://doi.org/10.2139/ssrn.1876530","url":null,"abstract":"Based on a structural model for initial firm size, survival and firm growth we estimate firm-specific transition probabilities between size classes of the firm size distribution. This allows an assessment of the impact of different (counterfactual) economic policy measures on intra-distribution dynamics of the firm size distribution. We find that policies increasing the life span of firms reduce the exit hazard of young firms, but also reduce the probability to be a Gazelle. An increase in the industry-wide entry rate increases the exit hazards of incumbent firms and has no strong impact on the likelihood of firms to become Gazelles. Increasing market growth, by contrast, decreases the exit hazards for incumbent firms and slightly increases the likelihood of firms to be Gazelles. Finally, an increase in the birth size of firms increases the probability of young firms to be Gazelles with strongest effects for the smallest firms.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125556027","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper presents a model of bundling and tying when the threat of entry provides the primary competitive constraint, but entrants have a disadvantage with respect to the incumbent, i.e., in a, “nearly contestable,” market. The entrant’s disadvantage can be with respect to marginal costs, the fixed cost of a good, or the fixed cost of an offering (which can be interpreted as a product differentiation advantage). The incumbent’s profits depend on both the nature of its cost advantage and the set of offerings. With an advantage in the fixed cost of an offering, the incumbent prefers mixed bundling if it is sustainable. With a marginal cost advantage, the incumbent prefers pure bundling, in which all customers buy both components. While the latter result might appear to formalize a commonly-alleged rationale for tying, the practice can be a Pareto improvement over mixed bundling and can cause total consumer surplus to increase relative to only selling the products separately. Mixed bundling can lower consumer surplus and be a form of product proliferation.
{"title":"Tying and Bundling in a Nearly Contestable Market","authors":"M. Salinger","doi":"10.2139/ssrn.1857551","DOIUrl":"https://doi.org/10.2139/ssrn.1857551","url":null,"abstract":"This paper presents a model of bundling and tying when the threat of entry provides the primary competitive constraint, but entrants have a disadvantage with respect to the incumbent, i.e., in a, “nearly contestable,” market. The entrant’s disadvantage can be with respect to marginal costs, the fixed cost of a good, or the fixed cost of an offering (which can be interpreted as a product differentiation advantage). The incumbent’s profits depend on both the nature of its cost advantage and the set of offerings. With an advantage in the fixed cost of an offering, the incumbent prefers mixed bundling if it is sustainable. With a marginal cost advantage, the incumbent prefers pure bundling, in which all customers buy both components. While the latter result might appear to formalize a commonly-alleged rationale for tying, the practice can be a Pareto improvement over mixed bundling and can cause total consumer surplus to increase relative to only selling the products separately. Mixed bundling can lower consumer surplus and be a form of product proliferation.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128412444","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2011-05-01DOI: 10.1111/j.1475-4991.2011.00453.x
M. Grimm, Jens Kruger, J. Lay
This paper investigates the patterns of capital entry barriers and capital returns in informal Micro and Small Enterprises (MSE's) using a unique micro data set seven West-African countries. The author's findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated to most activities. The authors find very heterogeneous patterns of capital returns in informal MSE's. At very low levels of capital, marginal returns are extremely high- often exceeding 70 percent per month. Above a capital stock of 150 international dollars, marginal returns are found to be relatively low at around 4 to 7 percent monthly. The authors provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSE's appear to be severely capital constrained.
{"title":"Barriers to Entry and Returns to Capital in Informal Activities: Evidence from Sub-Saharan Africa","authors":"M. Grimm, Jens Kruger, J. Lay","doi":"10.1111/j.1475-4991.2011.00453.x","DOIUrl":"https://doi.org/10.1111/j.1475-4991.2011.00453.x","url":null,"abstract":"This paper investigates the patterns of capital entry barriers and capital returns in informal Micro and Small Enterprises (MSE's) using a unique micro data set seven West-African countries. The author's findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated to most activities. The authors find very heterogeneous patterns of capital returns in informal MSE's. At very low levels of capital, marginal returns are extremely high- often exceeding 70 percent per month. Above a capital stock of 150 international dollars, marginal returns are found to be relatively low at around 4 to 7 percent monthly. The authors provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSE's appear to be severely capital constrained.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115293764","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Does entry into the export market enhance firms’ productivity? In this paper, we estimate the instantaneous and long-run effects of exporting on the productivity of Chinese manufacturing firms during 2001 and 2007. We argue that pre-export R&D plays a crucial role in generating post-entry productivity gains by increasing firms’ absorptive capacity. Adopting propensity score matching in our estimation, we find that: (1) On average, starting to export has an instantaneous effect in raising productivity by 2%, but there are no significant long-run effects. (2) Firms that have ever invested in R&D before exporting experience large and lasting productivity gains, while for firms without pre-export R&D the gains do not exist even instantaneously. (3) The productivity gains exporting are increasing in the number of years a firm invests in pre-export R&D.
{"title":"Pre-Export R&D, Exporting and Productivity Gains: Evidence from Chinese Firms","authors":"Miaojie Yu, Mi Dai","doi":"10.2139/ssrn.1734721","DOIUrl":"https://doi.org/10.2139/ssrn.1734721","url":null,"abstract":"Does entry into the export market enhance firms’ productivity? In this paper, we estimate the instantaneous and long-run effects of exporting on the productivity of Chinese manufacturing firms during 2001 and 2007. We argue that pre-export R&D plays a crucial role in generating post-entry productivity gains by increasing firms’ absorptive capacity. Adopting propensity score matching in our estimation, we find that: (1) On average, starting to export has an instantaneous effect in raising productivity by 2%, but there are no significant long-run effects. (2) Firms that have ever invested in R&D before exporting experience large and lasting productivity gains, while for firms without pre-export R&D the gains do not exist even instantaneously. (3) The productivity gains exporting are increasing in the number of years a firm invests in pre-export R&D.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"123 7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-01-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124254037","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a nonparametric approach that allows for discrimination among alternative models of entry in first-price auctions. Three models of entry are considered: those of Levin and Smith (1994), Samuelson (1985), and a new model in which the information received at the entry stage is imperfectly correlated with bidder valuations. We derive testable restrictions of these models based on how the pro-competitive selection effect shifts bidder valuation quantiles in response to an increase in the number of potential bidders.
{"title":"What Model for Entry in First-Price Auctions? A Nonparametric Approach","authors":"Vadim Marmer, Artyom Shneyerov, P. Xu","doi":"10.2139/ssrn.1628367","DOIUrl":"https://doi.org/10.2139/ssrn.1628367","url":null,"abstract":"We develop a nonparametric approach that allows for discrimination among alternative models of entry in first-price auctions. Three models of entry are considered: those of Levin and Smith (1994), Samuelson (1985), and a new model in which the information received at the entry stage is imperfectly correlated with bidder valuations. We derive testable restrictions of these models based on how the pro-competitive selection effect shifts bidder valuation quantiles in response to an increase in the number of potential bidders.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122202282","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Deregulation and the succeeding changes, such as forming group affiliation, demutualization, and new entry from foreign countries, are widespread and worldwide phenomenon in the life insurance industry. This study examines impacts of the deregulation and the succeeding changes on efficiency of the Japanese life insurance industry using a Stochastic Input Distance Frontier Approach, a new version of Stochastic Frontier Analysis (SFA), which is the first application to an insurance industry. The main results are as follows. First, a group affiliated life insurer is more efficient than the others. Second, an efficiency difference between mutual and stock life insurers has been getting larger since deregulation. Third, there is not much difference of efficiency between foreign insurers and domestic insurers. We also find that efficiency of life insurers has decreased on average after deregulation.
{"title":"Effect of Group Affiliation, Ownership Structures, and New Entries on Efficiency: Lessons from the Japanese Life Insurance Industry after Deregulation","authors":"Noriyoshi Yanase, Kozo Harimaya, Yoshihiro Asai","doi":"10.2139/ssrn.1557342","DOIUrl":"https://doi.org/10.2139/ssrn.1557342","url":null,"abstract":"Deregulation and the succeeding changes, such as forming group affiliation, demutualization, and new entry from foreign countries, are widespread and worldwide phenomenon in the life insurance industry. This study examines impacts of the deregulation and the succeeding changes on efficiency of the Japanese life insurance industry using a Stochastic Input Distance Frontier Approach, a new version of Stochastic Frontier Analysis (SFA), which is the first application to an insurance industry. The main results are as follows. First, a group affiliated life insurer is more efficient than the others. Second, an efficiency difference between mutual and stock life insurers has been getting larger since deregulation. Third, there is not much difference of efficiency between foreign insurers and domestic insurers. We also find that efficiency of life insurers has decreased on average after deregulation.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-02-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134453635","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We present an infinite horizon model that studies the competition between a relatively ineffective incumbent Credit Rating Agency (CRA) and a sequence of entrant CRAs that are potentially more effective but whose ability in appraising default risk is unproven at the time they enter the market. We show that free entry competition in the credit rating business fails in selecting the most competent CRA as long as two conditions are met. First, investors and issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment of issuers' default risk. Second, CRAs cannot charge higher fees for low rating than for high rating. Under these conditions a rather incompetent CRA can dominate the market without being worried about potentially more competent entrants. We derive policy implications.
{"title":"Natural Barrier to Entry in the Credit Rating Industry","authors":"Doh-Shin Jeon, S. Lovo","doi":"10.2139/ssrn.1695519","DOIUrl":"https://doi.org/10.2139/ssrn.1695519","url":null,"abstract":"We present an infinite horizon model that studies the competition between a relatively ineffective incumbent Credit Rating Agency (CRA) and a sequence of entrant CRAs that are potentially more effective but whose ability in appraising default risk is unproven at the time they enter the market. We show that free entry competition in the credit rating business fails in selecting the most competent CRA as long as two conditions are met. First, investors and issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment of issuers' default risk. Second, CRAs cannot charge higher fees for low rating than for high rating. Under these conditions a rather incompetent CRA can dominate the market without being worried about potentially more competent entrants. We derive policy implications.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"46 2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-02-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116650599","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
H. Dietl, Markus Lang, Martin Lutzenberger, Stephan M. Wagner
This paper analyzes the market entry of Red Parcel Post, a new player in the German Business-to-Business (B2B) parcel market. Currently there are four large service providers in the German B2B parcel market. Each of these incumbent providers operates - albeit with varying degrees of automation - with a classical multi-hub-and-spoke network. Red Parcel Post plans to enter the B2B parcel market with a completely new parcel delivery system for the delivery of B2B parcels throughout Germany based on a new transport network design, and RFID- and GPS-based operations. Such operations shall enable the entrant to offer new services to potential customers and realize lower costs and prices than the established firms. We describe the market and contrast the incumbents' and the entrant's business strategies. Moreover, we develop a model to analyze the effect of the entrant's market entry on competitive strategies, market shares, prices, costs and profits. First, we solve the game-theoretic model analytically to derive qualitative results. In a second step, we simulate market entry and competition by calibrating the model with data from the German B2B market illustrating the impact of market entry in various scenarios.
{"title":"RFID-based Entry into the German B2B Parcel Market and its Effect on Competitive Strategies, Prices and Market Shares: The Case of Red Parcel Post","authors":"H. Dietl, Markus Lang, Martin Lutzenberger, Stephan M. Wagner","doi":"10.2139/ssrn.1156002","DOIUrl":"https://doi.org/10.2139/ssrn.1156002","url":null,"abstract":"This paper analyzes the market entry of Red Parcel Post, a new player in the German Business-to-Business (B2B) parcel market. Currently there are four large service providers in the German B2B parcel market. Each of these incumbent providers operates - albeit with varying degrees of automation - with a classical multi-hub-and-spoke network. Red Parcel Post plans to enter the B2B parcel market with a completely new parcel delivery system for the delivery of B2B parcels throughout Germany based on a new transport network design, and RFID- and GPS-based operations. Such operations shall enable the entrant to offer new services to potential customers and realize lower costs and prices than the established firms. We describe the market and contrast the incumbents' and the entrant's business strategies. Moreover, we develop a model to analyze the effect of the entrant's market entry on competitive strategies, market shares, prices, costs and profits. First, we solve the game-theoretic model analytically to derive qualitative results. In a second step, we simulate market entry and competition by calibrating the model with data from the German B2B market illustrating the impact of market entry in various scenarios.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116870124","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
{"title":"Banking Deregulations, Financing Constraints and Firm Entry Size","authors":"W. Kerr, Ramana Nanda","doi":"10.2139/ssrn.1441259","DOIUrl":"https://doi.org/10.2139/ssrn.1441259","url":null,"abstract":"We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127162933","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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