Cost Reduction, Entry, And The Dynamics Of Market Structure And Economic Growth
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Abstract:
I study the joint determination of market structure and growth in an oligopolistic economy. Firms run in-house R&D programs to produce over time a continuous flow of cost-reducing (incremental) innovations. In symmetric equilibrium, the dispersion of resources across firms prevents the exploitation of scale economies in R&D and slows down growth. In free-entry equilibrium, the number of firms changes with market and technological conditions and is endogenous. In particular, R&D spending is a (fixed) sunk cost and there is a negative feed-back of the rate of growth on the number of firms. The explicit consideration of the interdependence of market structure and growth produces novel results. The comparative statics effects of many parameters are no longer those predicted by conventional wisdom. For example, I find negative effects of population size and R&D productivity on growth. The key to these results is a fundamental trade-off between growth and variety, between the rate of growth of consumption of each product and the number of products. Firms do not internalize this trade-off and the market grows faster and supplies less variety than is optimal. Taxes and subsidies bring Pareto efficiency.Keywords:
Free entry
Comparative statics
Endogenous growth theory
This paper examines the impact of firms' conduct on market structure. It studies the evolution of concentration in UK manufacturing following the abolition of cartels using a theoretical framework based on Sutton's theory of market structure and a panel data set of four-digit industries over 1958-1977. The econometric results suggest that the intensity of price competition has a positive effect on concentration in exogenous sunk cost industries as well as in advertising-intensive and R&D-intensive industries. The concentration-market size relationship, while negative in exogenous sunk cost industries, breaks down in industries with high advertising or R&D intensity.
Cartel
Imperfect competition
Monopolistic competition
Market concentration
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This paper has three main objectives. First, using a wide variety of indicators, we examine how the industrial structure of Russia is changing during transition. We analyze what the implications of these changes are for potential competition. We then investigate the economic processes that direct these changes and econometrically test several hypotheses, put forward by Sutton (1991) and others, concerning the determinants of market structure. We find that Russian industrial structure is indeed experiencing dramatic changes. The size distribution of firms is generally converging to that found in the United States. Manufacturing concentration is increasing on average, but these averages mask huge structural changes. Product concentration is decreasing. Considered together, the various structural changes suggest that the potential for competition is actually improving. Central planning factors still partly explain the observed levels of concentration. We find no systematic differences between Soviet Russian concentration and market equilibrium concentration. We find no evidence that Russian industry concentration is converging to U.S. industry concentration. The evidence strongly suggests that the economic processes directing increases in concentration are different from those directing decreases and that the processes determining market structure in exogenous sunk cost industries are different from those in endogenous sunk cost industries. The individual determinants of changes in concentration tend support to several other hypotheses theoretically developed by Sutton (1991).
Market concentration
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We study the effects of a change in some exogenous variable (the fixed cost or a parameter in the payoff functions) on the strategies played in a Symmetric Cournot Equilibrium with Free Entry (SCEFE). We also show that any observation on prices, profits and number of firms is compatible with the assumption that the market under consideration is a SCEFE. Therefore, in this model, there is no direct link between profitability and the number of active firms.
Comparative statics
Free entry
Stochastic game
Fixed cost
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This paper examines the impact of firms' conduct on market structure. It studies the evolution of concentration in UK manufacturing following the abolition of cartels using a theoretical framework based on Sutton's theory of market structure and a panel data set of four-digit industries over 1958-1977. The econometric results suggest that the intensity of price competition has a positive impact on concentration in exogenous sunk cost industries as well as in advertising-intensive and R&D-intensive industries. The concentration-market size relationship, while negative in exogenous sunk cost industries, breaks down in industries with high advertising or R&D intensity.
Cartel
Imperfect competition
Monopolistic competition
Market concentration
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This paper studies the effect of information and sunk costs on the set of equilibria for a dynamic oligopoly model that incorporates price and entry/exit decisions. Contrary to the accepted view, sunk costs do not act as a barrier to entry, but in general cause excessive entry. When entry and exit is costless either no equilibrium exists or the market is monopolized. Therefore, even in a homogeneous product model, free entry implies neither zero profits nor an efficient allocation of resources.
Free entry
Complete information
Barriers to Entry
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Recent developments in the literature on market structure have allowed the generation of a few key testable predictions from the theory of strategic behaviour. The seminal model considers one simple but general relationship, that between market structure and market size, focusing on the competitive roles of endogenous sunk costs in the form of advertising and/or research and development (R&D). Evidence presented in this case study, building on earlier econometric work, shows that such endogenous sunk costs do play a crucial role in the formation of market structure in the global pharmaceutical industry.
Econometric model
Market Size
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This paper examines the impact of firms' conduct on market structure. It studies the evolution of concentration in UK manufacturing following the abolition of cartels using a theoretical framework based on Sutton's theory of market structure and a panel data set for four-digit industries over 1958-1977. The econometric results suggest that the intensity of price competition has a positive impact on concentration in exogenous sunk cost industries as well as in advertising-intensive and R&D-intensive industries. The concentration-market size relationship, while negative in exogenous sunk cost industries, breaks down in industries with high advertising or R&D-intensity.
Econometric analysis
Market concentration
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This paper examines the impact of firms’ conduct on market structure. It studies the evolution of concentration in UK manufacturing following the abolition of cartels using a theoretical framework based on Sutton’s theory of market structure and a panel data set of four‐digit industries over 1958–1977. The econometric results suggest that the intensity of price competition has a positive effect on concentration in exogenous sunk cost industries as well as in advertising‐intensive and R&D‐intensive industries. The concentration‐market size relationship, while negative in exogenous sunk cost industries, breaks down in industries with high advertising or R&D intensity.
Cartel
Monopolistic competition
Market concentration
Imperfect competition
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Barriers to Entry
Deterrence theory
Free entry
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