Software availability and entry

Research Summary What happens to market structure as an industry's operations lean ever more on software? We find that software availability is associated with an increase in entry and an increase in exit by the oldest and most established firms. We suggest three potential mechanisms and, through post hoc analysis, determine which is most consistent with observed patterns. We find the effect of software availability on entry is stronger in settings with more available IT talent, more permissive labor policies, and greater demand uncertainty. Observed patterns are most consistent with software enhancing labor productivity and thus reducing exposure to uncertainty. Managerial Summary Managers and policymakers are concerned with whether technologies like software and robotics spreading to new industries can make powerful firms even harder to unseat. For software, we find evidence consistent with the opposite: as software becomes more prevalent, entry by new firms increases and the likelihood that older firms exit increases. The patterns of entry we observe are consistent with the following mechanism. Software allows the same number of employees to serve a wider range of production levels, meaning that potential startups are less likely to be deterred by uncertain demand.