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

characteristics poorly, i.e., if there are market specific unobservables, there may be
greater or lesser entry into a district than we expect. This is however something that we
can and do control for econometrically.
2.2 The Model
Our model borrows its structure from standard two-stage entry games, where in
the first stage, firms decide whether or not to enter, and in the second, compete in prices
or quantities. Utilizing panel data means that we view our firms playing this game every
year (= period), and the question is rephrased as whether or not to open a new outlet. 3
Having a static model means we assume that firms do not take into account the effects
that this period’s decisions have on future periods’ decisions. Alternatively, one can view
the profits (gross of entry costs) as expected discounted profits. 4 We will however to
some extent control for the static nature of our model by conditioning entry decisions on
existing market structure, i.e., past entry decisions. The form of second stage competition
is assumed common knowledge among the potential entrants.
To operationalize the model, we assume, in line with BR, that the (reduced form)
profit function of the firm net of entry costs, resulting from competition in the second
stage, is of the form
(2) Πijt = Sijt (.)Vijt (.)-Fijt (.)+eijt
where S(.) expected is market size, V(.) gives the variable profits per potential customer,
F(.) denotes the fixed entry costs (possibly unobserved by the econometrician), and eijt is
the period and firm specific (i.i.d. normally distributed, common knowledge) shock to
these costs. The functions S(.), V(.) and F(.) contain market and firm specific, possibly
time-varying variables, and the number of own and rival outlets may enter each of the
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