A Structural Analysis of Entry Order, Performance, and Geography: The Case of the Convenience-Store Industry in Japan

Despite a large literature that documents a market-share advantage for pioneering firms, entry-order effects on economic profits and their implications for marketing strategy are largely unknown due to limitations in accounting profits and costs. This paper empirically examines the entry-order effects on profit components: revenues, entry costs, expansion costs, and variable costs. Unlike conventional analyses, this paper leverages a structural approach that does not require information on accounting profits and costs. By assuming that forward-looking firms maximize economic profits under strategic interactions, the approach infers cost and revenue parameters such that these parameters justify the observed entry and expansion behaviors as equilibrium outcomes of a dynamic game. I apply the revealed-preference argument to the panel data set from the convenience-store industry in Japan on store counts and revenues for 47 geographic markets for years 1984 through 2010. Variation in entry order, store counts, and revenues across markets, firms, and years, together with the dynamic equilibrium model, allows researchers to uncover the entry-order effects on revenue and cost functions. I find whereas a firm earns 5.0% more revenues at the outlet level relative to the next entrant, the next entrant earns a reduction in variable costs per outlet and expansion costs per outlet by 5.7% and 15.9%, respectively. The difference in entry-order effects on profits accounts for 10.1% of the differences in total economic profits across two leading firms, 7-Eleven and LAWSON. Based on the interplay between competition, market growth, and geography, simulation analyses reveal that a firm may initially benefit from postponing its market-entry consideration, but the advantage could disappear in around 25 years. The benefits for a late entrant are larger if the market is growing and distant from the firm’s and competitor firms’ parent companies’ headquarters.