Unobserved heterogeneity in dynamic games : Cannibalization and preemptive entry of hamburger chains in Canada

We develop a dynamic entry model of multi-store oligopoly with heterogeneous markets, and estimate it using data on hamburger chains in Canada (1970–2005). Because more lucrative markets attract more entry, firms appear to favor the pres- ence of more rivals. Thus unobserved heterogeneity across geographical markets creates an endogeneity problem and poses a methodological challenge in the estimation of dynamic games, which we address by combining the procedures proposed by Kasahara and Shimotsu ( 2009), Arcidiacono and Miller ( 2011), and Bajari, Benkard, and Levin ( 2007). The results suggest that the omission of un- observed market heterogeneity attenuates the estimates of competition, and the trade-off between cannibalization and preemption is an important factor behind the evolution of market structure.