An Estimable Dynamic Model of Entry, Exit and Growth in Oligopoly Retail Markets

This paper presents an estimable dynamic structural model of an oligopoly retail industry. The model can be estimated using panel data of local retail markets with information on new entries, exits and the size and growth of incumbent firms. In our model, retail firms are vertically and horizontally differentiated, compete in prices, make investments to improve the quality of their businesses, and decide to exit or to continue in the market. The model extends in two important ways the entry-exit model estimated in Aguirregabiria and Mira (2007). First, it includes firm size and growth as endogenous variables. And second, the empirical model has two sources of permanent unobserved heterogeneity: local-market heterogeneity and firm heterogeneity. This allows the researcher to control for potentially important sources of bias when using firm panel data with many local markets and several time periods.