Market structure and entry : where's the beef?

We study the effects of market structure on entry using data from the UK fast food (counter-service burger) industry over the years 1991-1995. Over this period, the market can be characterized as a duopoly. We find that market structure matters greatly: for both firms, rival presence increases the probability of entry. We control for market specific time-invariant unobservables and their correlation with existing outlets of both firms through a variety of methods. Such unobservables generally play a minor role. For both firms, variable profits per customer are increasing in the number of own outlets, and decreasing in the number of rival outlets. Structural form estimations show that the positive effect of rival presence on the probability of entry is due to firm learning: rival presence increases the estimate of the size of the market. The firms are differently affected by demand variables and have different fixed costs of entry. These results strongly suggest the presence of product differentiation, firm learning and market power.