Product Variety as a Barrier to Entry: Evidence from the Post-Deregulation Korean Soju Market

Abstract

This paper studies a multi-product firm's use of product variety in its strategic interactions with entrant firms. In particular, we investigate whether new product launches by the incumbent firms influenced competitors' market entry decisions in the Korean soju market context. This market, previously composed of independent geographic markets, each with a protected incumbent producer, became open to nation-wide competition as a result of market deregulation in the early 1990's. Across the geographic soju markets, we build an econometric model that accounts for causal structures surrounding the incumbent firms' product variety and the number of firms in the market, and the model takes into account both observed and unobserved heterogeneity across firms and regions. The model parameters are estimated using instrumental variables techniques and we find that product proliferation and dominant market leadership of the incumbent firm served as barriers to entry following market deregulation.