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AnEstimableDynamicModelofEntry,Exit and Growth in Oligopoly Retail Markets

By Victor Aguirregabiria (corresponding, Pedro Mira and Hernan RomanVictor Aguirregabiria, Pedro Mira and Hernan Roman

Abstract

Retail industries are an important part of today’s economies. They employ a large fraction of the labor force, play a key role in the adoption and diffusion of new information technologies, and are closely related to the development and configuration of urban life. This paper presents an estimable dynamic structural model of an oligopoly retail industry. The model can be estimated using panel data of local retail markets with information on new entries, exitsandthesizeandgrowthofincumbentfirms. In our model, retail firms are vertically and horizontally differentiated, compete in prices, make investments to improve the quality of their businesses, and decide to exit or to continue in the market. The model extends in two important ways the entry-exit model estimated in Aguirregabiria and Mira (2007, AM hereafter). First, it includes firm size and growth as endogenous variables. And second, the empirical model has two sources of permanent unobserved heterogeneity: local-market heterogeneity and firm heterogeneity. This allows the researcher to control for potentially important sources of bias when using firm panel data with many local markets and several time periods. Not accounting for market unobserved heterogeneity can lead to biases in the estimation of those structural parameters that represent strategic interactions between firms’ decisions. Market heterogeneity induces a positive correlation between firms ’ decisions that can be spuriously confounded with positive strategic interactions. It is also well-known in panel data econometrics that ignoring unobserved heterogeneity across firms induces biases in the parameters that generate structural state dependence, e.g., investment costs

Topics: of Entry, Exit and Growth in Oligopoly Retail Markets
Year: 2014
OAI identifier: oai:CiteSeerX.psu:10.1.1.415.2385
Provided by: CiteSeerX
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