Estimation of an Entry Model with Discrete Product Differentiation and Multiple Equilibria: An Empirical Analysis of Competition Between Banks and Thrifts

We consider a simple model of market structure determination with discrete product differentiation and strategic interaction between firms. Our equilibrium concept is based on a set of relatively weak conditions that describe the profits of active and potential firms in a market. In our model, an observed market structure is an equilibrium if all firms in the market are profitable and no other firms could profitably enter. Given the weak nature of our equilibrium concept, our model admits multiple equilibria. Rather than imposing additional restrictions on the nature of the entry process or the profit functions of firms to circumvent the multiplicity problems, we employ an estimation approach that explictly incorporates the multiple equilibria. We implement this approach to study the determinants of market structure patterns for banks and thrifts in localized banking markets