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Market preemption as a barrier to entry in a growing, spatially extended market

University of British Columbia

In recent years, a number of economists have become interested in exploring a type of entry-deterring firm behavior known as preemptive entry. This type of behavior has been associated with established firms expanding their capacity in the neighborhood of existing capacity, either in the form of proliferating brands or similar products or opening new plants, in order to secure the custom derivative from existing or anticipated future demands in that neighborhood. The goal of such behavior is to deter entry, hence securing protection for monopoly profits. The major theoretical result which may be derived from a model of preemption is that if growth of the market is foreseen, an established firm will always have an incentive to preempt the market at a point in time when it would not pay a potential entrant to enter. We derive this result using a one-dimensional, linear spatial model, and we demonstrate that the result does not depend upon the assumption of a large number of potential entrants or on whether the market is one-dimensional or two-dimensional. The thesis is devoted to testing the implications of the theory of preemption empirically. The first implication which we examine is a profits implication. Using cost and revenue data from the supermarket industry, we search for indicative evidence for or against the following null hypothesis which is associated with the profits implication: The profits of a representative new supermarket are less than zero in its first twelve months of operation, where the supermarket is representative in the sense that its profits are calculated using average cost and average revenue data, and the average is over supermarkets. We perform a series of annual net profit calculations for the years 1970-1976 inclusive, and find that in any one of these years, the annual net profits of a representative new supermarket are negative and less than the annual net profits of a representative established supermarket. The second implication of the theory of preemption is a locational one. Using supermarket location data from the province of British Columbia, we construct two types of tests in order to ascertain the nature and extent of preemption in the Greater Vancouver Regional District (GVRD.) of British Columbia. First we use cross section data on store, ownership and the neighbor relations between stores in each of the four sub-markets of the GVRD in order to determine if our observations are consistent with a random process based on a set of probabilities which is independent of the neighbor relations between stores. We find that this null hypothesis of randomness may be rejected for the GVRD as a whole and its Vancouver sub-market, but not for the three other sub-markets which comprise the GVRD. Next, we use time series data on the date at which each store was established in the Vancouver sub-market, where that store was located, and which firm owned, it in order to determine if our observations are consistent with a state dependent probabilistic process in which the probability that any given store is owned by a given firm depends upon the neighbor relations that that store had with other stores in the sub-market at the time when it was established. We find that we may accept the hypothesis of state dependence: for the Vancouver sub-market. Finally, we conduct an analysis of the probabilities underlying the state dependent process and we obtain the result that preemptive location behavior has taken place in the Vancouver sub-market of the GVRD.

Text

2010-03-18

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http://hdl.handle.net/2429/22068

Economics

University of British Columbia

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