MARKET STRUCTURE AND ENTRY: WHERE'S THE BEEF? - CEPR

highly insignificant. In the LPM estimations, the fixed effects were jointly insignificant
for both firms. To explore this issue further, we estimated restricted models to see at
what level the controls for unobservables became significant. It transpired that as long as
we had POP (and even when having only POP) as an explanatory variable, the random
effects (fixed effects in LPM) were insignificant and very small.
One possible objection is that our chosen length and timing of the empirical
equivalent of the game theoretic model’s entry stage – a calendar year – is ad hoc. There
are however both qualitative and quantitative reasons why a calendar year is a natural
choice. For one thing, both firms are quoted companies, and necessarily report their
activities (including the openings of new outlets) in published annual reports. They both
also announce annual plans of new outlets to be opened. Quantitatively, we have looked
at the within-calendar year timing of McD’s outlet openings which we have for a longer
period. Using data from 1980 onwards (prior to 1980 the number of outlets opened was
significantly smaller) it is clear that most outlets are opened towards the end of a calendar
year. On average, over 30% of all outlets are opened in the month of December alone;
56% are opened in the 4 th quarter; and only 5.4% in the 1 st quarter. 18 Thus there is
significant evidence that the calendar year is the planning period for these firms.
Then there is the issue of the sample for estimation. As mentioned in Section 3, a
substantial proportion of markets has no outlets of either firm. Our estimations indicate
that the most important variable (measured in terms of increasing the number of correctly
predicted outcomes) is the population in a given market. Cross-tabulations reported
above show that a selection rule ‘exclude all observations with population below the
lowest population that has attracted an outlet by firm i’, does not reduce the sample
greatly, but does lead to a significant decrease in the proportion of markets with no
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