Anticipated Entry and Entry Deterrence: Evidence from the American Casino Industry

Abstract

Using new data on entry plans into the American casino industry, I find that incumbent firms invest in physical capacity when threatened with a nearby entry plan, and these strategic investments deter eventual entry. Consistent with an entry deterrence motive, incumbents respond to the threat of entry when entry is uncertain, but do not invest in physical capacity when entry is assured. Further, the average capacity expansion is associated with a 6.8 percentage point increase in the likelihood that the entry plan fails. These findings show that investments in deterrence are viable, especially when new entrants face significant other barriers to entry.

Keywords: Entry Deterrence, Strategic Preemption, Casino Industry

JEL Classification: L12, L83