Monday, November 5, 2012

Patterns of Entry and Entry Deterrence

Here is a video that (unfortunately) I could not embed in my job market paper:


The blue crosses indicate locations of established casinos (existing casinos prior to March 2003), and the red dots indicate locations of entry plans that I observe (March 2003 - August 2012).  Apart from being a cool illustration of the graphing features of R, I think the video shows quite a bit about the pattern of entry in the casino industry over the last decade.

My paper is about how those incumbents at the blue crosses respond to entry plans at the red dots, and the extent to which preemptive investments by incumbents can deter entry.  Here's the abstract:
Using a novel data set on entry plans into the American casino industry, I find that incumbent firms respond to the threat of entry by expanding capacity, and that these strategic investments are effective in deterring actual entry. Specifically, a standard deviation increase in incumbent casino capacity leads to 47 percent more failed plans for entry, ceteris paribus. To quantify the benefit of entry deterrence using a stock market event study, I estimate that a failure of an entry plan increases the equity value of incumbent firms by 10.4 to 13.3 percentage points. Additionally, I find that incumbents that increase capacity during a rival’s planning stage retain a larger share of loyal customers. This finding suggests that strategic investments by incumbents can increase patron loyalty, which increases the likelihood that the entry attempt will be deterred. Apart from providing credible evidence on entry deterrence and its form, this paper provides new empirical evidence on how the capital structure of firms relates to economic activity. In particular, incumbents that are highly leveraged tend to expand capacity less in response to a entry plan by a potential entrant, which suggests that highly leveraged firms engage in less aggressive strategic behavior.
For more on my research (including a pdf of this paper), check out my research page.

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