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Towards a Testable Model of Entry: A Study of the U.S. Manufacturing Industries

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  • Kessides, Ioannis N

Abstract

This paper develops a simple model of firms' entry decisions, fits it to interindustry data, and tests hypotheses related to contestability theory. It is shown that entry increases with the profit level of incumbents, holding fixed the expected losses that the entrant would suffer in the event of exit. These expected losses are greater the higher the probability of a predatory incumbent response and the larger the sunk costs that must be committed by the entrant. The effects of sunk costs are significant, and incumbents are significantly more likely to react aggressively when they are both profitable and concentrated. Copyright 1990 by The London School of Economics and Political Science.

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  • Kessides, Ioannis N, 1990. "Towards a Testable Model of Entry: A Study of the U.S. Manufacturing Industries," Economica, London School of Economics and Political Science, vol. 57(226), pages 219-238, May.
    • Handle: RePEc:bla:econom:v:57:y:1990:i:226:p:219-38
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    Cited by:

    1. Natália Barbosa, 2003. "What drives new firms into an industry? An integrative model of entry," NIMA Working Papers 23, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho.
    2. Taylor, Mark P, 1999. "Survival of the Fittest? An Analysis of Self-Employment Duration in Britain," Economic Journal, Royal Economic Society, vol. 109(454), pages 140-155, March.
    3. Marc Cowling & Mark Taylor & Peter Mitchell, 2004. "Job Creators," Manchester School, University of Manchester, vol. 72(5), pages 601-617, September.
    4. Carree, M. A. & Thurik, A. R., 1999. "The carrying capacity and entry and exit flows in retailing," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 985-1007, October.
    5. Campbell, Carl III, 1996. "The effects of state and industry economic conditions on new firm entry," Journal of Economics and Business, Elsevier, vol. 48(2), pages 167-183, May.
    6. Utterback, James M., 1941- & Suárez, Fernando F., 1960-, 1992. "Patterns of industrial evolution, dominant designs, and firms' survival," Working papers #79-92. Working paper (Sl, Massachusetts Institute of Technology (MIT), Sloan School of Management.

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