Imminent Entry and the Transition to Multimarket Rivalry in a Laboratory Setting

• Date: 01 December 2016
• Author: Owen R. Phillips,Charles F. Mason
• DOI: http://doi.org/10.1111/jems.12169
• Published date: 01 December 2016

Imminent Entry and the Transition to Multimarket

Rivalry in a Laboratory Setting

CHARLES F. MASON

Department of Economics & Finance

University of Wyoming,

Laramie, WY 82071; and Grantham Research Institute

London School of Economics,

London WC2A 2AE

bambuzlr@uwyo.edu

OWEN R. PHILLIPS

Department of Economics & Finance

University of Wyoming,

Laramie, WY 82071

OwenPhil@uwyo.edu

In this paper we study the behavior of rivals when there is a known probability of imminent entry.

Experimental markets are used to collect data on pre- and postentry production when there is an

announced time of possible entry; some markets experience entry and other do not. In all preentry

markets competition is more intense. Postentry behavior in all markets is more competitive

compared to a baseline that had no threat. There is evidence that postentry multimarket contact

raises outputs in those markets that did not experience entry, behavior we generally refer to as a

conduit effect.

1. Introduction

The potential threat of entry can influence the strategies of incumbent firms. Seemingly

imminent entry changes both a preentry and a possible postentry competitive landscape.

How these landscapes change may depend as much on the entrant as the cast of current

producers. The new firm can have little or no competitive market experience, or it can

enter with a history of rivalry from other and perhaps related markets. The entrant can

establish links to other markets if it operates in more than one market. It then becomes

a conduit through which events in one marketimpact behavior in other markets. In

general, learning in one market can be transferred to other markets through the conduit

firm. A web of multimarket producers creates interacting market connections (Phillips

and Mason, 2001).

An example of entry combined with multimarket participation is provided by

an antitrust case involving the Swedish packaging giant Tetra Pak. Known as a major

global provider of aseptic packaging, in the late 1980s and early 1990s TetraPak acquired

firms that allowed it to compete in the market for nonaseptic packaging. Prior to these

Support from the Paul Lowham Research Fund and the University of WyomingSchool of Energy Resources is

gratefully acknowledged. Any opinions, findings, conclusions, or recommendations expressed in this paper

are those of the authors and do not necessarily reflect the views of the funding source. Helpful comments on

earlier drafts were received fromseminar participants at the Amsterdam Center for Law & Economics (ACLE)

workshop, University of Amsterdam and the New Economics School, Moscow. Thanks are also due to two

anonymous referees who provided constructive feedback, which helped us focus the discussion. The usual

disclaimer applies.

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume25, Number 4, Winter 2016, 1018–1039

Transition to Multimarket Rivalry 1019

acquisitions, the market for nonaseptic packaging was dominated by two firms, Elopak

and PKL (Garc´

ıa-Gallego and Georgantz´

ıs, 1999). Tertra Pak’s entry plans were widely

announced. These plans created a different set of behavioral incentives for the already

existing firms in that market. Following the acquisitions, Elopak Italia complained that

Tetra Pak’s business practices brought economic harm to Elopak; an indication that

postmerger rivalry was intense. The European Competition Commission ultimately

decided against Tetra Pak.1Although the competition authority’s primary focus was on

the postevent behavior, we maintain there were important implications for premerger

behavior in the nonaseptic packaging market.

Imminent entry of the sort described above creates a transition to different market

structures. There is a period of time during which the already-producing firms have a

reasonable belief that another firm will enter the market. This may be known because

capital is being put in place, or there has been an announcement that a new firm is

planning to begin operations.2Also as communities develop, some firms have widely

known business plans to extend operations as populations or household incomes reach

a target level.3One can also think of a scenario in which entry is imminent once a patent

expires.4Alternatively, one can imagine the appointment of a new antitrust authority

that takes a far more aggressive stance towards existing oligopolies, and takes actions

that facilitate entry.5Duringthis transition are incumbent firms more or less cooperative

compared to the identical market structure without the threat of entry? How does

behavior compare in the postentry period to a market structure that has a long history

with no threat of entry?

In this paper we study transitions before and after the time that entry may occur.

Behavior can be modeled with firms using trigger strategies to punish noncooperative

actions. The repeated game has a known transition point at which the number of firms

possibly increases by one. There may be no actual entry, but until the transition point

there is a threat. If entry occurs, it is either from a newly formed firm entering, or an

established firm extending its operations into another market. Although the analytics

suggest that rivals are less cooperative as a result of the threat of entry, it is difficult to

predict behavior after the possible time of entry. In order to learn more about pre- and

1. This decision was upheld in 1996 following an appeal. See Russo et al. (2010, pp. 153–158) for more

discussion. Evidently Tetra Pak attempted to work aroundthis decision by acquiring the Italian firm Italpak;

this led to a second major finding against Tetra Pak in 2004 (Siragusa and Baretta,2008).

2. Cabela’s, a large retailer of outdoor equipment and clothing, selects potential retail sites years in ad-

vance of building, and may choose not build a store after investing in a land site. Once the firm decides

to go forward it will announce 2 or 3 years in advance that it is planning to open a new store, and begin

construction. In this way,incumbent retailers have probabilistic signals that are directly linked to Cabela’s de-

cision to enter a geographic market (see, e.g., http://phx.corporate-ir.net/phoenix.zhtml?c=177739&p=irol-

newsArticle&ID=1990864; last accessed November 19, 2014).

3. Yum! Brands Inc., owners of the restaurant chains KFC, Pizza Hut, and TacoBell measures its growth

opportunities in terms of restaurants/million people. In the United States it averages 58 restaurants per mil-

lion people. In its top emerging markets, Yum! Brands has two restaurants per million (http://www.yum.

com/annualreport/). It currently targets entry for its identified emerging markets: In the United States,

Yum! Seeks a minimum of 5,000 people in a trade area for a Pizza Hut franchise, and a minimum

of 15,000 people in a trade area for KFC and Taco Bell restaurants (http://www.yum.com/company/

realestate/documents/RealEstateContactsVisual.pdf). Once a community’s population reaches one of these

thresholds,entrymayoccur.

4. For example, the effect of entry after a patent’s expiration has been studied extensively in the phar-

maceutical industry. See Berndt et al (2003). For discussion on behavior before entry see Ellison and Ellison

(2011).

5. Of course, existing firms may take actions that impede entry. Our focus abstracts from this possibility,

and so is better viewed as a characterization of the potential effect of a shift in antitrust policy towards

potentially collusive firms.