Measuring Preemption in Dynamic Oligopoly Games

Abstract

This paper proposes an approach to measure preemptive entry in a dynamic oligopoly game between two retail chains. I first define preemptive motives by decomposing firms’ equilibrium conditions and isolating out the preemptive gain from all other entry motives of firms. By forcing firms to ignore their preemptive motives and re-optimize their values, I then obtain a counterfactual that eliminates the effect of preemption without changing the structural parameters of the game. Compared to other approaches in the literature, this method has the advantage of preserving the direct competitive effect and the dynamic features of the game while removing the indirect strategic effect of competition. I implement this method in two applications: one numerical and the other empirical. In the numerical application, I study the influence of entry and exit costs on preemption and find that firms can successfully preempt entry without large exit costs, a result contrary to the conventional wisdom. In the empirical application, I examine how the effects of preemption vary across market size in the Canadian burger industry and find that the effects are much stronger in medium-sized markets than small or large markets.