LAUSR

ABSTRACT I study competition between big box retailers, K-Mart and Wal-Mart, and toy retailers, KB Toys and Toys R Us with the aim of estimating Wal-Mart’s effect on the profits of toy retailers. Using recent techniques for the moment inequality models, I estimate chains’ exit decisions in each market as arising from a Nash equilibrium of a static game of entry and exit. My results show that Wal-Mart has a significantly negative effect on the profits of KB Toys and Toys R Us, while the effects of KB Toys and Toys R Us are mostly positive on each other’s profits. I run a series of counterfactual simulations to study the effect of a merger between KB Toys and Toys R Us on post-merger market shares and concentration. Upon merging, the rate of exit drops from 52.3% to 48.6% for KB Toys and from 32.1% to 11.7% for Toys R Us. If the merging parties share distribution centres, the rate of exit drops even further to 31.1% for KB Toys or remains about the same at 12.2% for Toys R Us. Surprisingly, the merger lowers market concentration, as measured by the Herfindal–Hirschman Index.