Thursday, December 9, 2010
Does the Fourth Entrant Make Any Difference? Entry and Competition in the Early U.S. Broadband Market
Posted by D. Daniel Sokol
Mo Xiao (University of Arizona) and Peter F. Orazem (Iowa State University) ask Does the Fourth Entrant Make Any Difference? Entry and Competition in the Early U.S. Broadband Market.
ABSTRACT: We study the importance of sunk costs in determining entry conditions and inferences about firm conduct in an adapted Bresnahan and Reiss (1991, 1994) framework. In our framework, entrants incur sunk costs to enter, while incumbents disregard these costs in deciding on continuation or exit. We apply this framework to study entry and competition in the local U.S. broadband markets from 1999 to 2003. Ignoring sunk costs generates unreasonable variation in firmsâ€™ competitive conduct over time. This variation disappears when entry costs are allowed. Once the market has one to three incumbent firms, the fourth entrant has little effect on competitive conduct.