Market structure and competition in transition: Results from a spatial analysis

Entry of new firms and exit of others is an essential element of competition in a market economy. By studying the relationship between market structure (entry, exit and the number of firms in a market) and market size (population) for different regional markets, economists can gain insight into the determinants of firm profitability, the role of fixed and sunk costs, as well as the nature of competition. The present paper provides the first empirical evidence on this issue for a transition economy. In our empirical approach (which follows Schaumans and Verboven (2015); a detailed survey of the empirical literature is also available in Aguirregabiria and Suzuki (forthcoming)), we estimate size thresholds required to support different numbers of firms for four retail and professional service industries in a large number of distinct geographic markets in Slovakia. Specific emphasis is given to the spatial interaction between local markets. The empirical analysis is carried out for three time periods (1995, 2001 and 2010) characterizing different stages of the transition process.

Our results indicate that the effect of entry on market conduct has changed over time. While entry threshold ratios tend to be larger than one and decline with the number of firms in most professions in 1995, the estimation results obtained for 2010 suggest entry threshold ratios much closer to one. This finding is consistent with observations suggesting a significant decline in entry barriers.

The second novel contribution of the present paper regards the explicit analysis of spatial spill-over effects in the entry-threshold approach. These effects should be particularly important in densely populated markets (such as those of Central European countries). Parameter estimates from spatial ordered probit models suggest that demand spill-overs and/or the effects associated with a positive correlation in unobservable explanatory variables seem to outweigh negative spill-over effects caused by competitive forces between neighboring cities and villages. While these spatial effects are found to decline over the transition period for automobile dealers and plumbers, we observe an increase in the estimated spill-over parameters for electricians and restaurants.

Aguirregabiria V., and Suzuki, J., (forthcoming). Empirical Games of Market Entry and Spatial Competition in Retail Industries. Chapter 9 in Emek Basker (Ed.), Handbook on the Economics of Retailing and Distribution, Edward Elgar Publishing.

Schaumans, C. and Verboven, F. (2015). Entry and competition in differentiated products markets. The Review of Economics and Statistics, 97(1), pp. 195-209.