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| Title: | An Empirical Model of Industry Dynamics with Common Uncertainty and
Learning from the Actions of Competitors |
| Authors: | Yang, Nathan |
| Keywords: | Agglomeration, commercial real estate investment, dynamic discrete
choice game, entry and exit, investment delay, market structure, retail competition. |
| Issue Date: | 21-Dec-2011 |
| Series/Report no.: | NET Institute Working Papers;11_16 |
| Abstract: | This paper advances our collective knowledge about the role of learning
in retail agglomeration. Uncertainty about new markets provides an
opportunity for sequential learning, where one rm s past entry
decisions signal to others the potential pro tability of risky markets.
The setting is Canada s hamburger fast food industry from its early days
in 1970 to 2005, for which simple analysis of my unique data reveals
empirical patterns pointing towards retail agglomeration. The notion
that uninformed potential entrants have an incentive to learn, but not
informed incumbents, motivates an intuitive double-di¤erence
approach that separately identi es learning by exploiting
di¤erences in the way potential entrants and incumbents react to
spillovers. This identi cation strategy con rms that information
externalities are key drivers of agglomeration. Esti- mates from a
dynamic oligopoly model of entry with information externalities provide
further evidence of learning, as I show that common uncertainty matters.
Counterfac- tual analysis reveals that an industry with uncertainty is
initially less competitive than an industry with certainty, but catches
up over time. Furthermore, there are many instances in which chains
enter markets they would have avoided had they not faced uncertainty.
Finally, consistent with the interpretation of uncertainty as an entry
barrier, I nd that chains place signi cant premiums on certainty at
proportions beyond 2% of their total value from being monopolists. |
| URI: | http://hdl.handle.net/2451/31410 |
| Appears in Collections: | NET Institute Working Papers Series
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| 11_16.pdf | NET Institute Working Paper 11_16 | 434 kB | Adobe PDF | View/Open |
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