Entry- and Sunk-Cost Spillovers from the Rival: Evidence from Entry and Expansion of KFC and McDonald's in Chinese Cities

We model the entry and expansion of KFC and McDonald's in Chinese cities as a dynamic game. We assume that the observed entry and expansion decisions are equilibrium outcomes. This allows us to recover the structural parameters of the game without solving for equilibrium. We use the estimated model to study the entry- and sunk-cost spillovers from the rival. Our estimates suggest substantial spillovers to the cost of entering a new city. For example, if the rival is not present in the city in which the chain is entering and the distance from the nearest city where the rival is present decreases by 100 kilometers, the cost of entry into the city decreases by 1.22 standard deviations for KFC and 1.52 standard deviations for McDonald's. If the rival is already present in the city, a one-unit increase in the number of rival's outlets decreases the cost of entry by 0.59 standard deviations for McDonald's but increases it by 1.49 standard deviations for KFC. We also find that the spillovers to the sunk cost of opening a new outlet are much smaller. Hence the expansion within a city is not as much influenced by the presence of the rival as is the entry into a new city.