Location Choice And Profit-Increasing Entry

Research Seminars
Academic Areas Marketing
Professor Amit Pazgal, Jesse H. Jones Graduate School of Business, Rice University
March 1, 2013 | 10:30 AM - 12:00 PM | Friday
AC2MLT, hyderabad, Hyderabad, India
For ISB Community
Despite conventional wisdom that firm profits decrease with competitive entry, the empirical literature highlights a number of situations where the entry of a quality-equivalent profitable competitor into a market has resulted in higher profits for the incumbent firms. Our paper studies how location choices affect the possibility that profits increase for all incumbents with a competitive entry by a new rival. We first provide conditions under which entry can increase profits of all incumbent firms under a standard spatial model based on the circular market model of Salop (1979). We then examine the relationship between profits and the number of firms when firms can choose their locations on a circle; if some level of entry leads to increased incumbent profits, we show that the overall relationship between the number of firms and profits must have a down-up-down pattern. Finally, we note that entry can increase profits for all firms even when the entrant's location is such that it competes directly with only one of the incumbent firms. Thus, firms do not need the entry to directly affect the incentives of all their competitors to be better off.