Preemptive Entry and Technology Diffusion: The Market for Drive-In Theaters

Shilong Sun and his co-authors explore this question in a paper published in the RAND Journal of Economics, examining preemptive entry as a strategic tool for blocking competitors in industries with limited capacity.

Using market data from the US drive-in theater sector during its rapid expansion between 1945 and 1957, the authors identify strong evidence of a non-monotonic relationship between market size and early entry probability. Preemptive entry is most likely in intermediate-sized markets, where firms can credibly deter future rivals. In small markets, entry is unattractive, while in large markets, entry cannot be effectively blocked.

The authors also develop and estimate a dynamic structural model of preemptive entry, contrasting the factual entry patterns, entry costs, and firms’ expected value with what would arise counterfactually in the absence of preemption.

The views expressed in this paper are the sole responsibility of the authors and cannot be attributed to Compass Lexecon or any other parties.

Abstract

This article studies entry preemption in new industries. We first test a key prediction of dynamic entry games: Entry preemption is most relevant in intermediate-sized markets, where firms face highest uncertainty about future entry. Using US drive-in theater market (1945–1957) data, we find robust evidence for this non-monotonic relationship between market size and early entry probability. We then estimate a dynamic entry game, and quantify preemption effects through counterfactual analysis. Preemptive motives increase early entry by up to 40% in mid-size markets, raising entry costs by 5% and reducing firms' expected value by 1%.