Entry, exit, and the determinants of market structure

Dunne, Timothy; Klimek, Shawn D.; Roberts, Mark J.; Xu, Daniel Yi

Working Paper

Entry, exit, and the determinants of market structure

Abstract: 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.

Keywords: entry; exit; market structure; competition; service industry;

JEL Classification: L11; L13; L84;