Entry, Exit, and the Determinants of Market Structure

Timothy Dunne, Shawn D. Klimek, Mark J. Roberts, and Daniel Yi Xu
Working Paper 2013-10
October 2013

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This paper estimates a dynamic, structural model of entry and exit in an oligopolistic industry and uses it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. Entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all found to be important determinants of long-run firm values, firm turnover, and market structure. Estimates for the dentist industry allow the entry cost to differ for geographic markets that were designated as Health Professional Shortage Areas and in which entry was subsidized. The estimated mean entry cost is 11 percent lower in these markets. Using simulations, we compare entry-cost versus fixed-cost subsidies and find that entry-cost subsidies are less expensive per additional firm.

JEL classification: L11, L13, L84

Key words: entry, exit, market structure, competition, service industry

The authors are grateful to the editor, Aviv Nevo, two anonymous referees, Victor Aguirregabiria, Steven Berry, Allan Collard-Wexler, Ariel Pakes, and Chad Syverson for helpful comments and Joe Mazur for research assistance. All results have been reviewed to ensure than no confidential information is disclosed. The views expressed here are the authors' and not necessarily those of the U.S. Census Bureau, the Federal Reserve Bank of Atlanta, or the Federal Reserve System. Any remaining errors are the authors' responsibility. This paper is a revised draft of National Bureau of Economic Research Working Paper 15313 and is forthcoming in the Rand Journal of Economics.

Please address questions regarding content to Timothy Dunne, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8543, tim.dunne@atl.frb.org; Shawn D. Klimek, Center for Economic Studies, U.S. Census Bureau, Center for Economic Studies, 4600 Silver Hill Road, Washington, DC 20233, 301-763-2861, shawn.d.klimek@census.gov; Mark J. Roberts, Department of Economics, the Pennsylvania State University and NBER, 513 Kern Building, University Park, PA 16802, 814-863-1535, mroberts@psu.edu; or Daniel Yi Xu, Department of Economics, Duke University and NBER, 305 Social Sciences Building, Box 90097, Durham, NC 27708-0097, 919-660-1824, daniel.xu@duke.edu.

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