Friday, June 1, 2012

Incumbents and Entrants in the Casino Market

You may have noticed that I have not posted to this blog in over a month.  I'm coming out of radio silence to tell you a little about what I have been doing to give you a sense for why I have not been posting.  

In the last month, I made a concerted push to move my research forward for my thesis proposal.  This required a great deal of effort on my part, and I felt that diverting my effort into regular blog posts would lead to (A) lower-quality thesis proposal research, and (B) lower-quality blog posts.  I chose to spend all of my time on my proposal because my thesis committee (my primary concern) and my blog readers (secondary concern, no offense) deserve better.

Another way to put it is that there both cost-based (thesis proposal) and benefit-based (blog quality) reasons why I haven't been blogging.  The rest of this post is about the cost side, but I plan to devote a future post to the benefit side.

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Now that I have completed my thesis proposal, here's an update of what I have found so far.  My paper is a study of the strategic interactions between incumbent firms and new entrants/ challengers, and I use some really detailed information about the American casino industry to make several points, which are my main findings:
  1. Around the time of an entry announcement of a close geographic rival, established incumbents make observable investments in casino capacity (expanding their gaming floor space).  As an interesting feature of the casino setting, these investments occur during the planning stage.
  2. Preemptive expansions in capacity (as in 1) seem to be predictive of failed entries.  I find 20 percent more failed entries for large capacity expansions (a standard deviation above the mean) than for the average.
  3. These results are consistent with stock market information about publicly-traded casino firms.  Three years after the first planning event (and controlling for a lot of things), I find that failed entries result in a 10 percentage point greater incumbent stock market value when compared to successful entries.
These facts do not fit with a demand-side story.  Maybe unobserved demand for casinos could explain #1 (incumbents expand capacity), but not at the same time as #2 (more failed entry when incumbents expand capacity).  Also, if you think that demand was driving things, you would be really surprised that failed entries (likely with low demand) result in higher stock market value for incumbents.  Taken together, I view these facts as evidence of strategic behavior by incumbents and entrants.

There's more to the research, including corroborating results and robustness checks, but this is the main idea.  In the future, if there is demand, I will post my thesis proposal slides on my research page.

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