Entry and Competition in Concentrated Markets

TLDR

The paper builds on entry models from competitive markets to show how the number of producers in an oligopoly changes with demand and competition. The study proposes an empirical framework to measure entry effects in concentrated markets. The framework uses data on geographically isolated monopolies, duopolies, and oligopolies to examine how firm count, market size, and competition interact. Empirical results show that competitive conduct shifts quickly as incumbents rise, with most variation occurring when the second or third firm enters a market of five or fewer, while additional entrants beyond three have minimal impact.

Abstract

This paper proposes an empirical framework for measuring the effects of entry in concentrated markets. Building on models of entry in atomistically competitive markets, we show how the number of producers in an oligopolistic market varies with changes in demand and market competition. These analytical results structure our empirical analysis of competition in five retail and professional industries. Using data on geographically isolated monopolies, duopolies, and oligopolies, we study the relationship between the number of firms in a market, market size, and competition. Our empirical results suggest that competitive conduct changes quickly as the number of incumbents increases. In markets with five or fewer incumbents, almost all variation in competitive conduct occurs with the entry of the second or third firm. Surprisingly, once the market has between three and five firms, the next entrant has little effect on competitive conduct.