Unobserved Heterogeneity in Dynamic Games: Cannibalization and Preemptive Entry of Hamburger Chains in Canada

Quantitative Economics, Forthcoming

54 Pages Posted: 30 May 2013 Last revised: 5 Sep 2015

See all articles by Mitsuru Igami

Mitsuru Igami

Yale University - Department of Economics ; Yale University - Cowles Foundation

Nathan Yang

Cornell University

Date Written: September 2, 2015

Abstract

We develop a dynamic entry model of multi-store oligopoly with heterogeneous markets, and estimate it using data on hamburger chains in Canada (1970-2005). Because more lucrative markets attract more entry, firms appear to favor the presence of more rivals. Thus unobserved heterogeneity across geographical markets creates an endogeneity problem and poses a methodological challenge in the estimation of dynamic games, which we address by combining the procedures proposed by Kasahara and Shimotsu (2009), Arcidiacono and Miller (2011), and Bajari, Benkard, and Levin (2007), respectively. The results suggest the omission of unobserved market heterogeneity attenuates the estimates of competition, and the tradeoff between cannibalization and preemption is an important factor behind the evolution of market structure.

Keywords: Dynamic Oligopoly, Entry and Exit, Market Structure, Unobserved Heterogeneity

Suggested Citation

Igami, Mitsuru and Yang, Nathan, Unobserved Heterogeneity in Dynamic Games: Cannibalization and Preemptive Entry of Hamburger Chains in Canada (September 2, 2015). Quantitative Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2271803 or http://dx.doi.org/10.2139/ssrn.2271803

Mitsuru Igami (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Nathan Yang

Cornell University ( email )

Dyson School, Warren Hall
360E
Ithaca, NY 14853-6201
United States
6072551590 (Phone)

HOME PAGE: http://dyson.cornell.edu/faculty-research/faculty/ncy6/

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