Market Entry, Product Quality, and Incumbent Firm Behavior
by Emilia Tjernstrom
Abstract: We study the influence of market entry by a social enterprise on incumbent firm behavior, market dynamics, and product quality in rural Kenyan markets. We design a field experiment that randomizes the timing of store openings to estimate the causal impact on existing businesses. Our results reveal that the increase in competition prompts local firms to sell higher-quality products with no detectable effect on prices. These impacts are concentrated at the lower end of the product quality spectrum and spatially close to the new entrant. Our data allow us to examine several dimensions of firm behavior: we find that incumbent stores respond to the new entrant by diversifying their suppliers, extending their product ranges, and providing their customers with special offers.
We provide experimental evidence on the effect of market entry on incumbent firm behavior, market dynamics, and product quality in rural Kenyan markets. We design a field experiment that randomizes the timing of store openings to estimate the causal impact on existing retailers. Our results show that the increase in competition prompts local firms to sell higher-quality products with no detectable effect on prices. The impacts are concentrated at the lower end of the product quality spectrum and spatially close to the new entrant. Our data allow us to examine several additional dimensions of firm behavior and show effects on supplier network diversification, extended product ranges, and special offers.