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Empirical Observations on Entry and Entry Dynamics

Empirical Observations on Entry and Entry Dynamics. Dunne, Roberts, and Samuelson study of manufacturing industries from 1963-1988: Entry is common Entrants are usually smaller than existing producers The survival rate is relatively low

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Empirical Observations on Entry and Entry Dynamics

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  1. Empirical Observations on Entry and Entry Dynamics • Dunne, Roberts, and Samuelson study of manufacturing industries from 1963-1988: • Entry is common • Entrants are usually smaller than existing producers • The survival rate is relatively low • The rate of entry is highly correlated with the rate of exit

  2. Where do Entrants Come From? • Dunne, Roberts, and Samuelson study finds: • New firms account for over half of all entrants and have highest exit rate • Existing firms entering new markets account for around one-third • Existing firms adding a new plant account for less than 10 percent and have lowest exit rate

  3. Timing of Entry Decisions • With simultaneous entry, inability to coordinate can result in too much (or too little) entry. • Over time, however, market should reach equilibrium. • With sequential entry, should not have this problem. • But how do firms signal their intentions?

  4. Possible Explanations for Frequency of Entrant Failure • Profit opportunities are brief. Failures are actually “hit and run” entries. • Entry is like a lottery ticket. Although most firms will fail, those that succeed get a very high payoff, so the expected value of entry is positive. • People and companies make mistakes. They may overestimate themselves and/or underestimate rivals.

  5. Why might entrants make mistakes? • Uncertainty about demand. • Initial market size. • Growth in demand over time. • Dissemination of information (word of mouth). • Uncertainty over product quality decreases. • Network externalities. • Uncertainty about firm-specific factors. • Efficiency/cost. • Product quality.

  6. Learning will result in Simultaneous Entry & Exit • Firms may not initially know about their relative position in the market,but they learn over time. • Inefficient firms leave market. • New firms continue to enter. • Over time, industry on average will become more and more efficient, “survival of the fittest”.

  7. Stages of Industry Evolution • Klepper and Grady study, data on variety of industries from product introduction to 1981. • Three phases: • Growth: number of firms steadily growing • Shakeout: number of firms steadily declining • Mature: number of firms has stabilized. • Many industries have long growth phases, average is 29 years. • Shakeout is intense, on average net decrease of 52% of firms

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