Competition in local-service sectors

Abstract

Although economically very important, local-service sectors have received little attention in the extensive literature on competitive interactions. Detailed data gathering in these sectors is hard, not only because of the multitude of local players, but also because key service dimensions are hard to quantify. Using empirical entry models in the tradition of Bresnahan and Reiss [Bresnahan, T.F., and Reiss, P.C. (1990). Entry in monopoly markets. Review of Economic Studies, 57 (192), 531–553, Bresnahan, T.F., and Reiss, P.C. (1991). Entry and competition in concentrated markets. Journal of Political Economy, 99 (5), 977–1009], we infer information on these sectors' degree of competition from the observed entry decisions in different local markets. We apply the empirical entry model to the video-rental market. Additional entries of video stores are found to significantly increase the level of competition. This occurs not only when a second player enters the market, but also in markets already characterized by two or more incumbents. Unlike the predictions of many economic models, we find this increase to be larger when the entry occurs in a duopoly than in a monopoly. Several control variables included in the model offer additional insights. As such, we find evidence of cannibalization from the upstream channel (movie theatres), but not from the downstream channel (premium cable). In addition, various socio-demographic characteristics of the trading zone, such as income and household size, are found to also have a significant impact on store performance.